Robin Joseph grade report (#215637)
Financial Management – 2019 May – Final Assignment
Your Assignment
ASSESSMENT
After a couple of hours with Felix you have assembled the following information from him:
– Orohena Pearls (owned by a business school roommate of Felix), an established supplier of
Tahitian Pearls, located close to Pape’ete in Tahiti, is prepared to give him exclusive rights
to sell their products in Switzerland for a six-year period in exchange for an upfront payment
for those rights;
– Single, undrilled, pearls sell in Tahiti for an average of 14,800 XPF each and Orohena
Pearls (OP) is prepared to sell them to Felix at a 35% discount to this price (XPF is the
international code for CFP francs the currency used in Tahiti and other parts of French
Polynesia)
– OP would ship to Felix on receipt of payment for each order;
– Felix has found out that air freight (including insurance) from OP via courier would cost on
average XPF 1,800 per pearl, and that the time from him placing an order to receiving the
goods in Zurich would be three weeks (including the preparation and packing time in Tahiti);
he would also have to pay the courier cost to OP on ordering;
– Felix plans to order from OP monthly 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 pearls to
customers;
– He will buy racking and a special safe at a total cost of CHF 5,700 to store the pearls,
and has found a small commercial room nearby that he can rent for CHF 850 per month,
payable monthly in advance, plus a security deposit of three month’s rent (refundable in full if
there is no damage to the premises);
– He will also install an alarm system at an initial cost of CHF 5,500, plus a CHF 100 per
month monitoring fee;
– Felix will sell the pearls by internet only, and is planning to spend CHF 8,000 with a
website designer to develop the site;
– He has already spent CHF 9,000 on a market study that told him that once established,
demand would be about 250 pearls per month, although in the first year sales would start at
only 30 in the first month before building up slowly to the full level at the end of the first
year, after which they would remain constant;
– The above study assumed an average selling price in Switzerland of CHF 270 per pearl
(ignore any impact of VAT/sales taxes in your calculations);
– Packaging and shipping within Switzerland would average CHF 15 per pearl, and Felix is not
currently intending to charge that to the customer;
– All internet sales would be by credit card, with the credit card company taking 1.2% per
sale and remitting the total monthly to Felix fifteen days after the end of each calendar
month;
– Felix believes that two students could run the operation part time at a total monthly cost
to him (including employer’s social charges) of CHF 3,600 each;
– Felix believes that if necessary he could borrow up to an additional CHF 75,000 at 6%
p.a.;
– The effective overall marginal tax rate on income from a company set up to undertake this
activity would be 40%, payable one year in arrears; Felix has also told you that he can
invest any available cash at an after tax 4% per annum.
Felix also has a friend, Paula, who owns two jewellery shops in the Zurich area. Paula is
interested in the venture and has agreed that if Felix can incorporate the pearls into
pendants, she would give him a one year contract to purchase 30 pendants per month. She
would pay Felix CHF 170 cash for each pendant (to be paid on delivery to Paula), and these
sales would be in addition to the internet sales outlined above (and would start immediately).
To do this Felix would need to purchase a small drill and jig (costing CHF 550) to hold the
pearl while drilling, as well as silver chains and clasps at a cost of CHF 25 per set, plus CHF
7.50 for a presentation box for the pendant. He would also hire an assistant specifically to
make and deliver the pendants at an additional cost of CHF 350 per month. ?
Felix remembers lectures on discounted cash flow analysis at business school (although he
admits that he does not remember them well, 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 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 for each further year;
– 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 Felix could offer OP as an upfront fee for the exclusive rights for the six
year period (which does not include any pearl purchases) which would leave him 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 method you have chosen to decide whether the venture is
attractive or not, and what, if anything, you would do differently in any future financial
analysis of this type, and why?
Felix 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 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 (within the 25 page limit as above) should be as follows:
1. Cover Page (1 page)
2. Table of Contents/List of Exhibits (1 page)
3. Executive Summary
4. Main Report
5. Critical Reflection
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 financial viability analysis: 25%
– Other financial details (P&L Statement, Balance Sheet, break even, etc): 35%
– Critical reflection: 10%
– Referencing and presentation: 5%
EXPECTATIONS
Based on the data in the question you should have developed the following:
– buy-in cost from Tahiti XPF 9,620 (14,800*65%) per pearl or about CHF 89 each at
current exchange rates
– air freight to Zurich about CHF 16.70 per pearl
– assumed selling price CHF 270 per pearl
– packing and shipping to customers CHF 15 per pearl
– credit card fee, 1.2%.
That information should then be used to develop a contribution per print.
You should have considered the following in your submission, making reasonable assumption(s)
where necessary:
– exchange rate from XPF to CHF based on an assumed (and specified) exchange rate, and
expected development over the forecast period (or at least a clear assumption of no change),
or based on constant prices
– import duty into Switzerland
– wastage (due to damage in transit or in storage and handling in Switzerland)
– administration and investment costs (office equipment, stationery, etc)
– cost to register website name and to host the site, etc
– advertising and promotion, insurance, business formation, etc.
You should also have estimated fixed costs (and associated amortisation/depreciation, as
appropriate), considering the following and others:
– initial investment of CHF 5,700 for racking and safe
– rent of CHF 850 per month (plus initial CHF 2,550 deposit)
– initial working capital (to cover inventory and up-front payment to OP before receipt of
payment from credit card company)
– CHF 8,000 for website designer (note however that the CHF 9,000 market study cost is
sunk and therefore not relevant to the decision)
– CHF 5,500 for alarm system, plus ongoing CHF 100 per month monitoring fee
– CHF 3,600 monthly salaries
– amortisation of rights fee
– other costs based on your own assumptions.
These data could then have been used to calculate a break-even point and for the basis of a
discounted cash flow analysis. Your result might show the venture is profitable or not,
depending on your assumptions for exchange rate and the extent to which you have included
assumptions on other costs; either would be acceptable for the assessment. It is important
to understand that you are preparing a management accounting report, not a financial
accounting one and therefore there is no strict need to follow standards such as IFRS
(except, for example, for the calculation of tax).
You could have also raised other aspects which might be relevant and as noted you should
have made some sensitivity analysis to consider, for example, changes in selling prices, sales
volumes, exchange rates, etc.
You should have developed the cash flow monthly over the first year, recognising the need to
invest up front in inventory, and then over the following five years. You need to estimate the
initial cash input that will be required until the venture becomes cash positive (which should
not simply be the total CHF 900,000 but should relate to the amount required to fund the
investment). Ideally some thought should have been given to whether the discount rate was
pre- or post-tax, and an assumption made, with the cash flow calculation made on the same
basis. If you considered inflation you would need to be sure that your assumptions on
discount rate and exchange rate were consistent with your inflation. At the end of six years
the working capital should be reduced to zero, giving a positive inflow and/or some sort of
logical assumption made for a terminal value, followed by the final tax payment in the seventh
year.
Finally, an assessment of the proposed venture with Paula should have been addressed.
When making your recommendations some thought should be given to alternatives to make the
opportunity more attractive, such as proposing a variable, rather than a fixed, fee to OP.
All sections specified should have been addressed:
– A summary of all assumptions and estimates that you have made for your analysis, including
justifications where appropriate;
– A break even analysis;
– A Balance Sheet at start-up (to show the initial capital) and at the end of the first year
– A Profit and Loss Statement for the first year;
– Monthly cash flow for the first year of operation;
– Annual Cash Flow Statements 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 Felix could offer OP as an upfront fee for the exclusive rights for the seven
year period which would leave him no better or worse off than if he did not undertake the
venture, and the amount you suggest he should actually offer them;
– Conclusions and recommendations;
– Some critical reflection of the analysis that he has asked you to prepare – what, if
anything, would you do differently in a financial analysis of this opportunity, and why?
COMMENTS SPECIFIC TO YOUR SUBMISSION
Please see your annotated paper, attached.
Mark: 10 (provisional)