Walter Finance Analysis Help With Solution
You have been asked by your 61 year old uncle Walter 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.
Walter lives in Sydney, Australia, and recently took early retirement (from a company he joined 35 years ago), and left the company with a lump sum (tax paid) payment of AUD 550,000. 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 coated almonds. He is confident that he can set up a business to import coated almonds from the USA and sell them in Australia. His wife, whom 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 Walter you have assembled the following information from him:
– West Coast Nuts is an established US producer of fine coated almonds in different varieties, such as chocolate, cinnamon, honey, etc; they have received authorisation from the Australian Department of Agriculture that the products comply with their food safety standards;
– West Coast Nuts is prepared to give Walter exclusive rights to sell their products in Australia for a five year period in exchange for a single upfront payment;
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– The nuts retail in the USA for an average of $ 35 per kilogramme, and West Coast Nuts is prepared to set the selling price to Walter at a 60% discount to this price;
– West Coast Nuts would ship to Walter on receipt of payment for each order;
– Walter has found out that air freight from California via air courier would cost on average $5 per kg and that the time from him placing an order to receiving the goods in Sydney would be two weeks (including the processing time in California);
– Walter plans to order from California every two weeks (to maximise the shelf life in Australia) and intends to maintain a minimum stock of six 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 AUD 3,500 to keep the nuts in good condition, and has found a small industrial room he can rent nearby at a cost of AUD 300 per month (payable monthly in advance, plus an initial three month deposit);
– Walter will sell the chocolate throughout Australia by internet only, and is planning to spend AUD 5,000 with a website designer to develop the site;
– He has already spent AUD 7,500 on a market study that told him that once established, demand would be about 1,100 kg a month, although in the first year sales would start at only 500 kg 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 of AUD 38 per kg (ignore any impact of sales tax in your calculations);
– Packaging and shipping in Australia would average AUD 3 per kg, and Walter is not intending to charge that to the customer;
– All sales would be by credit card, with the credit card company taking 1% per sale and remitting the monthly total to Walter five days after the end of each calendar month;
– He believes that one person could run the chocolate operation part-time at a total cost (including social charges) of AUD 5,000 per month;
– Walter believes that if necessary he could borrow up to an additional AUD 50,000 at 8% p.a.;
– Walter’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.
Walter also has a friend, Kathy, who runs a small chain of delicatessens in the Sydney area. Kathy is interested in the venture and has agreed that if Walter packages an assortment of almonds in gift boxes, decorated with views of California, she would buy one hundred boxes (each containing 550 gm of almonds) from him per month (which would be in addition to the internet sales outlined above, and would start immediately), at a price of AUD 20 each. To do this Walter would need to buy in boxes and wrapping paper at a cost of AUD 2.50 per box and hire an assistant specifically to pack and deliver the boxes, at an additional cost of AUD 400 per month.
Walter remembers discussions on discounted cash flow analysis at business school (although he admits that he did not fully understand it, unlike his wife who was a distinction student). He has asked you to prepare an analysis while he is away to help him with the decision, making clear any assumptions that you make; the analysis should not exceed 3,000 words (excluding the content of exhibits, headings, etc), or a total of 20 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;
– Monthly cash flow in 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 Walter could offer West Coast Nuts as an upfront fee for the exclusive rights for the five 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.
Walter 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.
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 word limit as above)
5. Exhibits (if any)
6. 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.
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