Assessment 

You have been asked by your 61 years old aunt Gabrielle to help her assess a new venture. It is Friday night, and she needs the work finished by Sunday, in preparation for an early Monday morning meeting, so you know that she will not be able to give you any more information than she already has (and you will be unable to contact her over the weekend), and therefore you should rely on your own assumptions and estimates for some of the analysis where appropriate. Gabrielle lives in Paris, France and recently took early retirement (from a supermarket group she joined 30 years ago), leaving the company with a lump sum (after tax) payment of €630,000. Surprisingly, rather than being depressed by her new state of independence, she is excitedly contemplating a new career as an e-retailer of a range of coated nuts (almonds, walnuts, macadamia, pecans, etc). She is confident that she can set up a business to import the nuts from the USA and sell them in France. Her husband, who she met at business school, is pleased with her passion for this possible new venture, but concerned that it might turn into a financial disaster. He has suggested that she develop a financial plan to evaluate the venture and its viability. After a couple of hours with Gabrielle you have assembled the following information from her: - WeLoveNuts Inc (WLN), an established US producer of coated nuts with unusual and innovative flavours (owned by one of Gabrielle’s university colleagues), is prepared to give her exclusive rights to sell their products in France for a four-year period in exchange for an upfront payment for those rights; - The nuts retail in the USA for an average of $28 per pound (lb), and WLN is prepared to set the selling price to Gabrielle at a 37% discount to this price; - WLN would ship to Gabrielle on receipt of payment for each order; - Gabrielle has discovered that air freight from the USA via courier would cost on average $3.50 per lb and that the time from her placing an order, to receiving the goods in Paris, would be three weeks (including the preparation and packing time in the USA); - Gabrielle plans to order from the USA monthly (to maximise the shelf life in France) and intends to maintain a minimum stock of four weeks’ worth of sales to ensure that she will be able to supply a suitable range of products to customers; - She will buy a special refrigerator at a cost of €6,500 to keep the nuts in good condition, and has found a small industrial room she can rent nearby at a cost of €825 per month (payable monthly in advance, plus an initial three month security deposit, refundable at the end of her tenancy if there is no damage); - Gabrielle will sell the nuts throughout France by internet, and is planning to spend €11,500 with a website designer to develop the website; - She has already spent €7,500 on a market study that told her that once established, demand would be about 220 kilogram (kg) a month, although in the first year sales would start at only 30 kg in the first month before building up slowly to the full level at the end of the first year when they would remain constant; - The above study assumed an average selling price in France of €85 per kg of nuts (ignore any impact of sales taxes in your calculations); - Packaging and shipping in France would average €3.50 per kg, and Gabrielle is not planning to charge that to the customer; - All internet sales would be by credit card, with the credit card company taking 1.2% handling fee per sale and remitting the net monthly total to Gabrielle two weeks after the end of each calendar month; - Gabrielle believes that two students could run the operation part-time, at a total cost to her (including employer’s social charges) of €22,000 per year; - She believes that if necessary she could borrow up to an additional €50,000 at 7% p.a.; - The effective overall marginal tax rate on income from a company set up to undertake this activity would be 35%, payable one year in arrears; Gabrielle has also told you that she can invest any available cash at an after tax 3% per annum. Gabrielle also has a friend, Quentin, who runs a small chain of travel agents in the Paris area. Quentin is interested in the venture and has agreed that if Gabrielle can package the nuts in boxes decorated with pictures of American landmarks, he would give her a twelve month contract to buy fifty boxes, each containing 350 grammes (gm) of nuts, from her per month. He would pay Gabrielle €20 each box, to be paid one month after delivery to him, and these sales would be in addition to the internet sales outlined above (and would start immediately). To do this Gabrielle would need to buy in boxes and decorative paper at a cost of €0.95 per box, purchase a printer at a cost of €650 to decorate the boxes, and hire an assistant specifically to pack and deliver the boxes at an additional cost of €200 per month. Gabrielle remembers lectures on discounted cash flow analysis at business school and she has asked you to prepare a financial analysis, while she is away, to help her with the decision, making clear any assumptions that you make; the analysis should not exceed 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 Gabrielle could offer WLN as an upfront fee for the exclusive rights for the four year period (which does not include any nut purchases) which would leave her no better or worse off than if she had not undertaken the venture, and the amount you suggest she should actually offer them; - Conclusions and recommendations; - A critical reflection of the analysis that Gabrielle has asked you to prepare; how you have evaluated the attractiveness of the venture and what, if anything, would you do differently in a financial analysis of this opportunity, and why? Gabrielle 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 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 will not be read beyond the point of the limit.

Do not put your name on the paper. The overall structure should be as follows:

1. Cover Page

2. Table of Contents/List of Exhibits

3. Executive Summary

4. Main Report

5. Critical Reflection

5. List of References.