Posted: September 7th, 2015

Developing a financial plan

Develop a financial plan to evaluate the venture and its viability.

You have been asked by your 55 year old uncle Xavier to help him assess a new venture.
Xavier lives in Paris, France, and was recently made redundant from a company he joined 30 years ago,
leaving the company with a lump sum (tax paid) payment of € 650,000. Surprisingly, rather than being
depressed by his new state of independence, he explains that he is tired of working for others and 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 France. 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 Xavier you have assembled the following information from him:
– West Coast Almonds is an established US producer of fine coated almonds in different varieties, such as
chocolate, cinnamon, honey, etc; they have received authorisation from the French Department of
Agriculture that the products comply with their food safety standards;
– West Coast Almonds is prepared to give Xavier exclusive rights to sell their products in France for a five
year period in exchange for a single upfront payment;
– The nuts retail in the USA for an average of $ 30 per kilogramme, and West Coast Almonds is prepared to
set the selling price to Xavier at a 55% discount to this price;
– West Coast Almonds would ship to Xavier on receipt of payment for each order;
– Xavier 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 Paris would be two weeks (including the
processing time in California);
– Xavier plans to order from California every two weeks (to maximise the shelf life in France) 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 € 2,500 to keep the nuts in good condition, and has found a
small industrial room he can rent nearby at a cost of € 500 per month (payable monthly in advance, plus an
initial three month deposit);
– Xavier will sell the almonds throughout France by internet only, and is planning to spend € 6,000 with a
website designer to develop the site;
– He has already spent € 5,500 on a market study that told him that once established, demand would be about
1,200 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 € 30 per kg (ignore any impact of sales tax in your
calculations);
– Packaging and shipping in France would average € 3 per kg, and Xavier 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 Xavier 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 € 5,000 per month;
– Xavier believes that if necessary he could borrow up to an additional € 50,000 at 8% p.a.;
– Xavier’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.
Xavier also has a friend, Laurent, who runs a small chain of delicatessens in the Paris area. Laurent is
interested in the venture and has agreed that if Xavier packages an assortment of almonds in gift boxes,
decorated with views of California, he 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 € 20 each. To do this Xavier 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
€ 400 per month.
Xavier 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 Xavier could offer West Coast Almonds as an upfront fee for the exclusive rights for a five
year period (after which he plans to retire) which would leave him no better or worse off than if he did not
undertake the venture, and the amount you suggest that he should actually offer West Coast Almonds;
– Conclusions and recommendations.
Xavier 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 final assessment will account for 70% of your overall
grade for this module. Submission is by the end of Sunday September 20th (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.
Submissions should be machine readable in MS-Word format only; submit only one file, and include any
Excel analysis as images, not embedded files.
The matrix on the following page is provided as a guide to the grading process.
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