Reference no: EM131770

You have been asked by your 56 year old AuntMary to help her assess a new venture. It is Friday night and She needs the work done by Sunday so you know that she will not be able to give you any more information than she already has, and therefore that you may need to rely on your own estimates for some of the analysis.

Mary was recently made redundant (from a company she joined 35 years ago) and left the company with a lump sum payment of $250,000. Surprisingly, rather than being depressed by her new state of independence, she is excitedly contemplating a new career as a retailer of fine chocolate. She is confident that she can set up a business to import chocolate from Switzerland and sell it in the USA. Herhusband, whom she met at business school, is pleased with her passion for her possible new venture, but concerned that it might turn into a financial disaster. She has suggested that she develops a financial plan to evaluate the venture and its viability.

After a couple of hours with Aunty Mary you have assembled the following information from her:

- SwissChoc SA is prepared to give her exclusive rights to sell their products in the USA for a ten year period;

- The products retail in Europe for an average of CHF 100 per kilogram;

- SwissChoc would sell products to Mary at a 40% discount to their European price (f.o.b.);

- SwissChoc would ship to Mary by DHL on receipt of payment for each order;

- Mary has found out that air freight from Switzerland would cost CHF 10 per kg and that shipment from the factory to her house would take three days;

- Mary plans to order from Switzerland every two weeks and expects to hold an average stock of two week worth of sales to ensure that she will be able supply a suitable range of products to customers;

- She will buy a special refrigerator at a cost of $5,000 to be able to keep the chocolate in her garage;

- Mary plans to sell by internet, and is planning to spend $1,000 to a website designer;

- She is not sure what price she will be able to achieve but is confident that it will be somewhere between $120 and $150 per kg;

- All sales would be by credit card, with the credit card company taking 2% per sale and remitting the balance to Mary once every month;

- Mary estimates that she will be able to build sales up slowly in the first year, averaging 30kg a week for the year as a whole, and continuing at a steady 50kg a week from the beginning of the second year onwards;

- She believes that one person could run the operation and hopes to do so herself, paying herself a salary of $5,000 per month in the first year, going up to $7,500 per month thereafter;

- Mary's marginal tax rate is 30%.

Mary believes that she could invest her redundancy lump sum at 5% per annum and therefore suggests using 5% as the discount rate for any discounted cash flow analysis.

Mary has asked you to prepare an analysis to help her with her decision, making clear any assumptions that you make; the analysis should not exceed 4,000 words (excluding the content of exhibits, headings, etc) and should include:

- A summary of all assumptions and estimates that you have made for your analysis, including justifications where appropriate;

- Monthly cash flow in the first year of operation;

- Annual cash flow thereafter;

- A sensitivity analysis that you think would be helpful;

- The amount which you believe Mary should be prepared to offer SwissChoc as an upfront fee to obtain the exclusive rights for a ten year period;

- Conclusions and recommendations.

Mary has explained that she is going to be out of town for a wedding so will be unable to provide any assistance at all, but as she pointed out before leaving "you business school students have it a lot easier than we did in our day, what with computers and the internet to help".