Financial Management

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 fin" rel="nofollow">inished by Sunday, in" rel="nofollow">in preparation for an early Monday mornin" rel="nofollow">ing meetin" rel="nofollow">ing, so you know that he will not be able to give you any more in" rel="nofollow">information than he already has , and therefore you may need to rely on your own assumptions and estimates for some of the analysis where appropriate. Jose lives in" rel="nofollow">in Houston, USA, and recently took early retirement (from an oil and gas company he join" rel="nofollow">ined 30 years ago), and left the company with a lump sum (after tax) payment of $525,000. Surprisin" rel="nofollow">ingly, rather than bein" rel="nofollow">ing depressed by his new state of in" rel="nofollow">independence, he is excitedly contemplatin" rel="nofollow">ing a new career as a retailer of a range of gourmet chocolates. He is confident that he can set up a busin" rel="nofollow">iness to import chocolates from Belgium and sell them in" rel="nofollow">in the USA. His wife, who he met at busin" rel="nofollow">iness school, is pleased with his passion for this possible new venture, but concerned that it might turn in" rel="nofollow">into a fin" rel="nofollow">inancial disaster. She has suggested that he develop a fin" rel="nofollow">inancial plan to evaluate the venture and its viability. After a couple of hours with Jose you have assembled the followin" rel="nofollow">ing in" rel="nofollow">information from him: - BelgoChoc SA, an established manufacturer of fin" rel="nofollow">ine chocolates with unusual and in" rel="nofollow">innovative flavours (owned by one of Jose's university colleagues), is prepared to give him exclusive rights to sell their products in" rel="nofollow">in the USA for a five-year period in" rel="nofollow">in exchange for an upfront payment for those rights; - The chocolates retail in" rel="nofollow">in Belgium for an average of Euro 65 per kilogramme, and BelgoChoc is prepared to set the sellin" rel="nofollow">ing 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 placin" rel="nofollow">ing an order, to receivin" rel="nofollow">ing the goods in" rel="nofollow">in Houston, would be two weeks (in" rel="nofollow">includin" rel="nofollow">ing the preparation and packin" rel="nofollow">ing time in" rel="nofollow">in Belgium); - Jose plans to order from Belgium monthly (to maximise the shelf life in" rel="nofollow">in the US) and in" rel="nofollow">intends to main" rel="nofollow">intain" rel="nofollow">in a min" rel="nofollow">inimum 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" rel="nofollow">in good condition, and has found a small in" rel="nofollow">industrial room he can rent nearby at a cost of $530 per month (payable monthly in" rel="nofollow">in advance, plus an in" rel="nofollow">initial three month deposit); - Jose will sell the chocolate by in" rel="nofollow">intemet only, throughout the USA, and is plannin" rel="nofollow">ing 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" rel="nofollow">in the first year sales would start at only 40 lb in" rel="nofollow">in the first month before buildin" rel="nofollow">ing up slowly to the full level at the end of the first year; - The above study assumed an average sellin" rel="nofollow">ing price in" rel="nofollow">in the USA of $55 per lb of chocolate (ignore any impact of sales taxes in" rel="nofollow">in your calculations); - Packagin" rel="nofollow">ing and shippin" rel="nofollow">ing in" rel="nofollow">in the US would average $3.50 per lb, and Jose is not in" rel="nofollow">intendin" rel="nofollow">ing to charge that to the customer; - All in" rel="nofollow">intemet sales would be by credit card, with the credit card company takin" rel="nofollow">ing 1.5% per sale and remittin" rel="nofollow">ing 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 (in" rel="nofollow">includin" rel="nofollow">ing 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 margin" rel="nofollow">inal tax rate on in" rel="nofollow">investment or earned in" rel="nofollow">income is 30%, payable one year in" rel="nofollow">in arrears; he has also told you that he can in" rel="nofollow">invest any available cash at an after tax 4% per annum. Jose also has a friend, Fatima, who runs a small chain" rel="nofollow">in of delicatessens in" rel="nofollow">in Texas. Fatima is in" rel="nofollow">interested in" rel="nofollow">in the venture and has agreed that if Jose would package the chocolates in" rel="nofollow">in boxes decorated with views of Belgium, she would buy forty boxes (each contain" rel="nofollow">inin" rel="nofollow">ing half a pound of chocolates) from him per month (which would be in" rel="nofollow">in addition to the in" rel="nofollow">intemet sales outlin" rel="nofollow">ined above, and would start immediately), at a price of $30 each. To do this Jose would need to buy in" rel="nofollow">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 busin" rel="nofollow">iness school (although he admits that he did not fully understand them, unlike his wife who was a distin" rel="nofollow">inction student). He has asked you to prepare a fin" rel="nofollow">inancial analysis while he is away to help him with the decision, makin" rel="nofollow">ing clear any assumptions that you make; the analysis should not exceed 4,000 words (excludin" rel="nofollow">ing the content of exhibits, headin" rel="nofollow">ings, etc), or a total of 25 pages (everythin" rel="nofollow">ing in" rel="nofollow">included), and should in" rel="nofollow">include: - A summary of all assumptions and estimates that you have made for your analysis, in" rel="nofollow">includin" rel="nofollow">ing 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" rel="nofollow">in plain" rel="nofollow">in English, of how much cash the venture will need to get started; - Any sensitivity analysis that you thin" rel="nofollow">ink 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 in" rel="nofollow">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; - A critical reflection of the analysis that Jose has asked you to prepare — what, if anythin" rel="nofollow">ing, you would do differently in" rel="nofollow">in a fin" rel="nofollow">inancial analysis of this opportunity, and why? Jose has explain" rel="nofollow">ined that he is goin" rel="nofollow">ing to be out of town for a weddin" rel="nofollow">ing so will be unable to provide any assistance at all, but as he poin" rel="nofollow">inted out before leavin" rel="nofollow">ing you will fin" rel="nofollow">ind this easy with computers and the in" rel="nofollow">intemet 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. exceedin" rel="nofollow">ing the word or page limit) will not be read beyond the poin" rel="nofollow">int of the limit; there is no min" rel="nofollow">inimum 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" rel="nofollow">in Report (within" rel="nofollow">in the 4,000 word limit as above) 5. List of references. The data in" rel="nofollow">in your answer should be clearly laid out in" rel="nofollow">in tabular format so that your approach and answer are both plain" rel="nofollow">inly evident. Submissions should be machin" rel="nofollow">ine readable in" rel="nofollow">in MS-Word format only; submit only one file, and in" rel="nofollow">include any Excel analysis Develop a Profit and Loss Statement for the first year of operations. clearly explain" rel="nofollow">in any assumptions in" rel="nofollow">in this P&L Statement