ACC00716 Finance Session 1, 2019

Assessment 3: Business Case Studies 2

Due date: 19 May 2019, 11PM

This assignment has a 25% weighting in your overall mark for this unit and focuses on content from Weeks 6, 7 and 8. The assignment will be marked out of 25 and marks will be allocated as indicated in the rubric on page 4. Your total assignment submission will consist of a word document and a spreadsheet.

The assignment is based on the case information below. While the company and financial data in the case are fictitious^[1], the context is not. Many companies face similar investment decisions as well as challenges and opportunities to run more environmentally and socially responsible businesses.

DuoLever Limited operates in the personal care (e.g. skin and hair care products) industry. All its products are sold in plastic packaging and a significant proportion in multi-layer sachets (or pouches)^[2].

Managers at DuoLever are acutely aware of the increase in world production of plastic and the environmental impact of plastic waste ending up in landfills, rivers and oceans. For example, it is estimated that 8 million metric tons entered the ocean in 2010 and this annual amount is predicted to more than double by 2025, accumulating as show in the following graph^[3]:

To help develop a closed-loop system related to the company's products, DuoLever has invested around $50 million in soft plastic recycling research, development and pilot testing. The outcome is a new and efficient method for recycling sachet waste. In fact, their recycling method is more energy efficient than producing virgin sachet plastic, reducing energy usage by 83%. The output plastic is of such high quality it can be used in food grade packaging applications. Currently, no other recycling method in the market can achieve this.

The company now faces a decision: should it (1) add production of recycled sachet plastic to the company's portfolio of businesses or (2) license use of the patented method? The CEO has asked you to undertake a financial analysis of the options and present your recommendations in a short memo.Option 1:

The recycling production option requires an upfront investment in plant and equipment of $20 million, which will be depreciated to a zero book value on a straight-line basis over 5 years. The plant will provide sufficient capacity to meet the company's forecast plastic packaging needs over the period of its life. After this, it is expected that the plant will have no salvage value and will be updated using new and better technology. Financing for the plant and equipment will be via a new 5 year debt issue, resulting in interest costs of $1.4 million payable at the end of each year.

Producing recycled plastic has several financial benefits for the company. First, sales revenue of the company's existing products, which will be packaged in the recycled plastic, is predicted to increase due to consumer demand for environmentally responsible products. Excluding this benefit, the company's forecast sales revenue for the coming year is $200 million and this is expected to grow by 4% each year after that. The benefit of recycled packaging is expected to increase these sales forecasts 2% during the 5 year life of the project.

The second benefit is that the cost of plastic packaging for the company's existing products will decrease. The recycled plastic will be cheaper than buying virgin plastic due to lower energy costs and avoiding a supplier margin. The reduced energy costs will shave 15% off total variable packaging costs, currently (without recycling) estimated at $22 million for the coming year and expected to grow by 3% per year after that. Avoiding a supplier margin will reduce total variable packaging costs by 10%. However, the benefits of avoiding the current supplier margin will be offset by the need to pay a new partner, Clean World Ltd, who will set up a plastic waste collection system to supply sufficient raw material for the recycling plant. Apart from these changes, it is expected that variable costs and net working capital will be equivalent to existing forecasts. However, an additional $2 million annually in selling, administrative and general expenses directly related to the project (excluding depreciation) will be incurred.

Option 2:

Option 2 involves licensing use of the patented recycling method to another company, Clean World Ltd, which has shown interest in taking on the entire project, not just supply of raw material. Initial negotiations between DuoLever and Clean World have reached some agreement on what the terms of the arrangement would involve. Clean World would produce recycled plastic using DuoLever's method for the next 5 years and all output during that time would be supplied exclusively to DuoLever for the same cost as DuoLever's existing virgin plastic supply forecasts. This means that Clean World would capture the energy savings associated with the new recycling method, along with a supplier margin. The benefits for DuoLever would be no initial outlay for plant and equipment and locked in packaging materials supply costs for the next 5 years. DuoLever would also retain the ability to market the environmentally responsible characteristics of its recycled packaging and so retain the expected additional sales revenue benefits of Option 1. Annual selling, administrative and general expenses would be just $1 million annually under Option 2, as no additional production administration would be required.

Other information:

DuoLever has an 8% weighted average cost of capital and is subject to a 25% tax rate on its income.

Required:

Prepare (1) a spreadsheet financial analysis of the proposed options and (2) a memo to DuoLever's CEO that briefly explains and justifies your chosen methods, inputs and any assumptions made, summarises your findings, and presents your recommendations on the proposed options. Ensure you not only address base case cash flows but also analyse potential uncertainty. Recommendations should address the decision to be made, along with any further follow up or other matters the company should consider prior to making a final decision.

Instructions:

Submit your spreadsheet separately in the provided spreadsheet link in the BCS2 section of the unit site. By submitting the spreadsheet, you are confirming that it is entirely your own work. Save the spreadsheet with your details in the file name using the following format (failure to do so could result in your spreadsheet not being considered in marking):

Student ID_Full_name_ACC00716A3

For example: 13579246_Jennifer_Harrison_ACC00716A3

The memo will be submitted as a word document via a Turnitin assignment link in the BCS2 section of the unit site and include your name, student ID, unit code (ACC00716), assessment number (A3) and word count at the beginning of the document. The remainder of the document should be set up as a formal memo and include an appendix with a screen shot(s) of your base case figures from the spreadsheet. Within the memo body, you may provide tables and figures that are discussed in the text and assist decision makers understand your methods, findings and their implications for decision making. The word document submission must not exceed 1,000 words (excluding the screen shot appendix and reference list).

This is an individual assessment exercise. The unit teaching team is very experienced at marking such assessments and recognising the differences between individual and "group" work, as well as data, facts, statements and ideas of others that have not been appropriately acknowledged. To avoid any potential for academic misconduct investigation, ensure that every aspect of your work is your own and that you acknowledge all sources you have directly drawn upon in your submitted work. Quotations should be shown as such. We are not fussy about referencing style, just that you reference when needed.

Assessment 3: Business Case Studies 2ACC00716 S1 2019

MARKING CRITERIA

Excellent

Very Good

Good

Satisfactory

Poor

Accurate estimation of

relevant base case cash flows and

decision criteria

(12 marks)

All relevant base case cash flows have been accurately

incorporated into the analysis

and net cash flows and decision criteria are correct. (12 marks)

Nearly all relevant base case cash flows have been

accurately incorporated into the analysis and decision

criteria are correct based on your net cash flows (10

marks)

Most relevant base case cash flows have been accurately

incorporated into the analysis and decision criteria are

mostly correct based on your net cash flows. (8 marks)

About half the relevant base case cash flows have been accurately

incorporated into the

analysis and decision

criteria are mostly correct

based on your net cash flows. (6 marks)

Less than half the relevant base case cash flows have

been accurately incorporated into the analysis and decision criteria may be mostly

incorrect based on your net cash flows. (0 to 4 marks)

Accurate and appropriate analysis of

uncertainty (5 marks)

You have accurately analysed project uncertainty using

appropriate techniques. You have shown insight by judicious input

choices that are well-articulated and linked to case facts. The

analysis is easy to follow. (5

marks)

You have accurately analysed project uncertainty using

appropriate techniques and judicious input choices that are mostly well-articulated

and linked to case facts. The

analysis is easy to follow. (4

marks)

You have analysed project uncertainty using appropriate techniques and mostly

judicious input choices that are mostly well-articulated

and linked to case facts. The analysis is easy to follow. (3.5

marks)

You have analysed project uncertainty using at least

one appropriate technique.

Input choices lack justification, are

unreasonable or the

analysis is not easy to follow. (2.5 marks)

You have not analysed project uncertainty using appropriate techniques or have

attempted to use at least one

appropriate technique but with no demonstrated

consideration of input choices in a hard to follow analysis or

there are major inaccuracies. (0 to 2 marks)

Appropriate interpretation and

recommendations based on the

project analysis (8 marks)

You have accurately interpreted the results of your financial

analysis and made appropriate

and insightful recommendations with the basis of those

recommendations clearly and concisely explained.

Recommendations go further than simply accepting or rejecting the project by recognising the subtleties of project decision

making and needed additional

analysis or considerations. Use of language makes meaning

consistently clear; no or very few grammar, syntax and spelling

errors. (8 marks)

You have accurately interpreted the results of your

financial analysis and made appropriate

recommendations.

Recommendations go further than simply accepting or

rejecting the project by

recognising some subtleties of project decision making

and/or needed additional

analysis or considerations.

Use of language mostly makes meaning clear; no or very few

grammar, syntax and spelling errors. (6.5 marks)

You have accurately interpreted most of the results of your financial

analysis and made some appropriate

recommendations. Subtleties of project analysis and

decision making have

generally not been

recognised. Use of language

mostly makes meaning clear; several grammar, syntax and spelling errors. (5.5 marks)

You have accurately interpreted some of the results of your financial

analysis and made at least one appropriate

recommendation. Use of language mostly makes meaning clear; several grammar, syntax and spelling errors. (4 marks)

You have not correctly interpreted most results from your financial analysis or no

recommendations have been made or recommendations

do not follow from the results or interpretation. Use of language mostly makes meaning unclear; many

grammar, syntax and spelling errors. (0 to 3 marks)

4

[1] UniLever and its research and development in the area of multi-layer sachet recycling provides the inspiration for this case but all facts related to the financial analysis are fictitious.

[2] While not necessary for attempting this case study, you will better understand the plastic packaging in this case context if you go to https://www.plasticpackagingfacts.org/blog/multi-layer-pouch-packaging-a-sustainable-story-animated/ and watch the video on multilayer plastic pouches. Although many improvements to this packaging have been made, as pointed out in the video, there remains much to do in reducing the impacts of waste pouches on the environment.

[3] Estimates from Jambeck, J.R., Andrady, A., Geyer, R., Narayan, R., Perryman, M., Siegler, T., Wilcox, C., Lavender Law, K. (2015) Plastic waste inputs from land into the ocean, Science, 347, p. 768-771 and graph reproduced from p. 770. If you are interested, see see https://jambeck.engr.uga.edu/landplasticinput for further details and an infographic.