You have been asked by your 60 year old uncle Jose to help him assess a new venture. It is Friday night, and he needs the work finished by Sunday, in preparation for an early Monday morning meeting, so you know that he will not be able to give you any more information than he already has (and you will be unable to contact him over the weekend), and therefore you may need to rely on your own assumptions and estimates for some of the analysis where appropriate. Jose lives in Houston, USA, and recently took early retirement (from an oil and gas company he joined 30 years ago), and left the company with a lump sum (after tax) payment of $525,000. Surprisingly, rather than being depressed by his new state of independence, he is excitedly contemplating a new career as a retailer of a range of gourmet chocolates. He is confident that he can set up a business to import chocolates from Belgium and sell them in the USA. His wife, who he met at business school, is pleased with his passion for this possible new venture, but concerned that it might turn into a financial disaster. She has suggested that he develop a financial plan to evaluate the venture and its viability. After a couple of hours with Jose you have assembled the following information from him: - BelgoChoc SA, an established manufacturer of fine chocolates with unusual and innovative flavours (owned by one of Jose’s university colleagues), is prepared to give him exclusive rights to sell their products in the USA for a five-year period in exchange for an upfront payment for those rights; - The chocolates retail in Belgium for an average of Euro 65 per kilogramme, and BelgoChoc is prepared to set the selling price to Jose at a 40% discount to this price; - BelgoChoc would ship to Jose on receipt of payment for each order; - Jose has found out that air freight from Belgium via courier would cost on average €8 per kg and that the time from him placing an order, to receiving the goods in Houston, would be two weeks (including the preparation and packing time in Belgium); - Jose plans to order from Belgium monthly (to maximise the shelf life in the US) and intends to maintain a minimum stock of four weeks’ worth of sales to ensure that he will be able to supply a suitable range of products to customers; - He will buy a special refrigerator at a cost of $4,750 to keep the chocolates in good condition, and has found a small industrial room he can rent nearby at a cost of $530 per month (payable monthly in advance, plus an initial three month deposit); - Jose will sell the chocolate by internet only, throughout the USA, and is planning to spend $8,750 with a website designer to develop the site; - He has already spent $7,500 on a market study that told him that once established, demand would be about 350 pounds (lb) a month, although in the first year sales would start at only 40 lb in the first month before building up slowly to the full level at the end of the first year; - The above study assumed an average selling price in the USA of $55 per lb of chocolate (ignore any impact of sales taxes in your calculations); - Packaging and shipping in the US would average $3.50 per lb, and Jose is not intending to charge that to the customer; - All internet sales would be by credit card, with the credit card company taking 1.5% per sale and remitting the monthly total to Jose five days after the end of each calendar month; - Jose believes that one person could run the chocolate operation part-time at a total cost to Jose (including employer’s social charges) of $2,650 per month; - He believes that if necessary he could borrow up to an additional $50,000 at 8% p.a.; - Jose’s marginal tax rate on investment or earned income is 30%, payable one year in arrears; he has also told you that he can invest any available cash at an after tax 4% per annum. Jose also has a friend, Fatima, who runs a small chain of delicatessens in Texas. Fatima is interested in the venture and has agreed that if Jose would package the chocolates in boxes decorated with views of Belgium, she would buy forty boxes (each containing half a pound of chocolates) from him per month (which would be in addition to the internet sales outlined above, and would start immediately), at a price of $30 each. To do this Jose would need to buy in boxes and decorative paper at a cost of $1.75 per box, and hire an assistant specifically to pack and deliver the boxes at an additional cost of $700 per month. Jose remembers lectures on discounted cash flow analysis at business school (although he admits that he did not fully understand them, unlike his wife who was a distinction student). He has asked you to prepare a financial analysis while he is away to help him with the decision, making clear any assumptions that you make; the analysis should not exceed 4,000 words (excluding the content of exhibits, headings, etc), or a total of 25 pages (everything included), and should include: - A summary of all assumptions and estimates that you have made for your analysis, including justifications where appropriate; - A break even analysis; - A Profit and Loss Statement for the first year of operations and Balance Sheet at the end of the first year; - Monthly cash flow for the first year of operation; - Annual cash flow thereafter; - A clear explanation, in plain English, of how much cash the venture will need to get started; - Any sensitivity analysis that you think would be helpful; - The most that Jose could offer BelgoChoc as an upfront fee for the exclusive rights for the five year period (which does not include any chocolate purchases) which would leave Jose no better or worse off than if he had not undertaken the venture, and the amount you suggest he should actually offer them; - Conclusions and recommendations; - A critical reflection of the analysis that Jose has asked you to prepare – what, if anything, you would do differently in a financial analysis of this opportunity, and why? Jose has explained that he is going to be out of town for a wedding so will be unable to provide any assistance at all, but as he pointed out before leaving “you will find this easy with computers and the internet to help”. Your report should demonstrate skills of critical reflection, effective communication and balanced judgement; note that this is not a market report. Scripts that are excessively long (i.e. exceeding the word or page limit) will not be read beyond the point of the limit; there is no minimum word limit. Do not put your name on the paper. The overall structure should be as follows: 1. Cover Page (1 page) 2. Table of Contents/List of Exhibits (1 page) 3. Executive Summary 4. Main Report (within the 4,000 word limit as above) 5. List of references. The data in your answer should be clearly laid out in tabular format so that your approach and answer are both plainly evident. Submissions should be machine readable in MS-Word format only; submit only one file, and include any Excel analysis as images, not embedded files. Grading will be based on the following breakdown: - Assumptions, estimates and sensitivity analysis: 25% - Cash flow and DCF analysis: 25% - Other financial details (P&L Statement, Balance Sheet, break even, etc): 25% - Critical reflection: 15% - Referencing and presentation: 10% Interim Assignment The Interim Assignment is to develop a Profit and Loss Statement for the first year of operations, which you will see is also part of the required content of your final assessment paper. You should clearly explain any assumptions in this P&L Statement and you may, if you wish, make any changes to your P&L Statement for your Unit 6 final assessment submission. The Interim Assignment is not graded.