You have been asked by your 57 year old aunt Helene 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 may need to rely on your own assumptions and
estimates for some of the analysis.
Helene lives in Rome, Italy, and was recently made redundant from a company she joined 30 years ago,
leaving the company with a lump sum (tax paid) payment of € 570,000. Surprisingly, rather than being
depressed by her new state of independence, she explains that she is tired of working for others and is
excitedly contemplating a new career as a retailer of a range of coated pecans. She is confident that she can
set up a business to import coated pecans from the USA and sell them in Italy. 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
After a couple of hours with Helene you have assembled the following information from her:
- West Coast Pecans is an established US producer of fine coated pecans in different varieties, such as
chocolate, cinnamon, honey, etc; they have already received authorisation from the Italian Department of
Agriculture that the products comply with their food safety standards;
- West Coast Pecans is prepared to give Helene exclusive rights to sell their products in Italy for a five year
period in exchange for a single upfront payment;
- The nuts retail in the USA for an average of $ 15 per pound (lb), and West Coast Pecans is prepared to set
the selling price to Helene with a 60% discount from this price;
- West Coast Pecans would ship to Helene on receipt of payment for each order;
- Helene has found out that air freight from California via air courier would cost on average $3 per pound
and that the time from her placing an order to receiving the goods in Rome would be two weeks (including
the processing time in California);
- Helene plans to order from California every two weeks (to maximise the shelf life in Italy) and intends to
maintain a minimum stock of six 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 € 2,000 to keep the nuts in good condition, and has found a
small industrial room she can rent nearby at a cost of € 400 per month (payable monthly in advance, plus an
initial three month deposit);
- Helene will sell the pecans throughout Italy by internet only, and is planning to spend € 5,000 with a
website designer to develop the site;
- She has already spent € 4,500 on a market study that told her that once established, demand would be about
1,100 kg a month, although in the first year sales would start at only 300 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 € 32 per kg (ignore any impact of sales tax in your
- Packaging and shipping in Italy would average € 4 per kg, and Helene is not intending to charge that to the
- All sales would be by credit card, with the credit card company taking 1% per sale and remitting the
monthly total to Helene five days after the end of each calendar month;
- She believes that one person could run the operation part-time at a total cost (including social charges) of €
5,500 per month;
- Helene believes that if necessary she could borrow up to an additional € 40,000 at 8% p.a.;
- Helene’s marginal tax rate on investment or earned income is 30%, payable one year in arrears; she has
also told you that she can invest any available cash at an after tax 4% per annum.
Helene also has a friend, George, who runs a small chain of delicatessens in the Rome area. George is interested in the venture and has agreed that if Helene packages an assortment of pecans in gift boxes, decorated with views of California, he would buy one hundred boxes (each containing 750 gm of pecans) from her per month (which would be in addition to the internet sales outlined above, and would start immediately), at a price of € 20 each. To do this Helene would need to buy in boxes and wrapping paper at a cost of € 2.50 per box, and hire an assistant specifically to pack and deliver the boxes, at an additional cost of € 1,000 per month.
Helene remembers discussions on discounted cash flow analysis at business school (although she admits that she did not fully understand them, unlike her husband who was a distinction student). She has asked you to prepare an analysis while she is away to help her 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;
- Balance sheet and P&L Statement for the end of the first year
- 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 Helene could offer West Coast Pecans as an upfront fee for the exclusive rights for a five year period (after which she plans to retire) which would leave her no better or worse off than if she did not undertake the venture, and the amount you suggest that she should actually offer West Coast Pecans;
- Conclusions and recommendations.
Helene 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. The final assessment will account for 100% of your overall grade for this module. Submission is by the end of Sunday January 22nd (Swiss time), despite any other dates that may be shown on the Syllabus.
Scripts that are excessively long (i.e. exceeding the word limit by more than 10%) will not be read beyond the point of the word limit; there is no minimum 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 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.