SCENARIO:

You have been asked by your 61-year-old uncle Benjamin to help him assess a new venture. It is Friday night, and he needs the work finished by Sunday, in preparation for an early Monday morning meeting, so you know that he will not be able to give you any more information than he already has (and you will be unable to contact him over the weekend), and therefore you may need to rely on your own assumptions and estimates for some of the analysis where appropriate.

Benjamin lives in Oslo, Norway, and recently took early retirement (from an oil and gas company he joined 30 years ago), and left the company with a lump sum (after tax) payment of 1.7 million Norwegian Krone (NOK). Surprisingly, rather than being depressed by his new state of independence, he is excitedly contemplating a new career as a retailer of a range of gourmet chocolates. He is confident that he can set up a business to import chocolates from Switzerland and sell them in Norway. His wife, who 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 Benjamin you have assembled the following information from him:

- Sprindt and Lungi (S&L), an established manufacturer of fine chocolates in Zurich with unusual and innovative flavours (owned by one of Benjamins university colleagues), is prepared to give him exclusive rights to sell their products in Norway for a five-year period in exchange for an upfront payment for those rights;

- The chocolates retail in Switzerland for an average of CHF 82 per kilogramme, and S&L is prepared to set the selling price to Benjamin at a 37% discount to this price;

- S&L would ship to Benjamin on receipt of payment for each order;

- Benjamin has found out that air freight from Switzerland via courier would cost on average CHF 9.50 per kg and that the time from him placing an order, to receiving the goods in Oslo, would be two weeks (including the preparation and packing time in Zurich);

- Benjamin plans to order from Switzerland monthly (to maximise the shelf life in Norway) and intends to maintain a minimum stock of four 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 NOK 55,000 to keep the chocolates in good condition, and has found a small industrial room he can rent nearby at a cost of NOK 7,200 per month (payable monthly in advance, plus an initial three month security deposit, refundable at the end of the tenancy);

- Benjamin plans to sell the chocolate by internet only, throughout Norway, and is planning to spend NOK 75,000 with a website designer to develop the site;

- He has already spent NOK 50,000 on a market study that told him that once established, demand would be about 420 kilograms (kg) a month, although in the first year sales would start at only 50 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 in Norway of NOK 750 per kg of chocolate (ignore any impact of sales taxes in your calculations);

- Packaging and shipping in Norway would average NOK 50 per kg, and Benjamin is not intending to charge that to the customer;

- All internet sales would be by credit card, with the credit card company taking 1.25% per sale and remitting the monthly total to Benjamin five days after the end of each calendar month;

- Benjamin plans to employ two part-time staff to run the operation at a total cost (including employers social charges) of NOK 80,000 per year each person; - He believes that if necessary he could borrow up to an additional NOK 500,000 at 7% p.a.;

- Benjamins marginal tax rate on investment or earned income is 35%, payable one year in arrears; he has also told you that he can invest any available cash at an after tax 3% per annum. Benjamin also has a friend, Liv, who owns a travel agent in a suburb of Oslo. Liv is interested in the venture and has agreed that if Benjamin would package the chocolates in boxes decorated with Alpine views, she would buy one hundred boxes (each containing 250gm of chocolates) from him per month, at a price of NOK 220 each. This would be in addition to the internet sales outlined above, and would start immediately. To do this Benjamin would need to buy in boxes and decorative paper at a cost of NOK 40 per box, and he has found a used table top wrapping machine that could be bought for NOK 15,000. He would also hire an assistant specifically to pack and deliver the boxes at an additional cost of NOK 4,200 per month.

Benjamin remembers lectures on discounted cash flow analysis at business school (although he admits that he did not fully understand them, unlike his wife who was a distinction student). He has asked you to prepare a financial analysis while he is away to help him with the decision, making clear any assumptions that you make

QUESTION: Make the financial analysis for the above scenario which should include the following:

- 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, of how much cash the venture will need to get started;

- Any sensitivity analysis that you think would be helpful;

- The most that Benjamin could offer S&L as an upfront fee for the exclusive rights for the five year period (which does not include any purchases of chocolate) which would leave him no better or worse off than if he had not undertaken the venture, and the amount you suggest he should actually offer them;

- Conclusions and recommendations (including any proposals to improve the profitability);

- A critical reflection of the analysis that Benjamin has asked you to prepare what, if anything, you would do differently in a financial analysis of this opportunity, and why?