You have been asked by your 60 year old uncle Erik 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.

Erik lives in Roskilde, Denmark, and was recently made redundant (from a company he joined 25 years ago), leaving the company with a lump sum (after tax) payment of DKK 3.2 million. Surprisingly, rather than being depressed by his new state of independence, he is tired of the corporate life and excitedly contemplating a new career as a retailer of intricately carved wooden animals. He is confident that he can set up a business to import the carvings from Australia and sell them in Denmark. 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 Erik you have assembled the following information from him:

- Eye4Detail, an established supplier of wooden carved animals in Australia, is prepared to give him exclusive rights to sell their products in Denmark for a five year period in exchange for an upfront payment for those rights;

- The carvings sell in Australia for an average of AUD 300 each, and Eye4Detail is prepared to sell them to Erik at a 55% discount to this price;

- Eye4Detail would ship to Erik on receipt of payment for each order;

- Erik has found out that air freight from Australia via air courier would cost on average AUD

195, for a shipment of ten carvings, and that the time from him placing an order to receiving the goods in Roskilde would be three weeks (including the preparation and packing time in Arizona);

- Erik plans to order from Australia monthly 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 racking costing DKK 16,000 to store the carvings, and has found a small industrial room he can rent nearby at a cost of DKK 7,500 per month (payable monthly in advance, plus

an initial three month deposit);

- Erik will sell the carvings by internet only, and is planning to spend DKK 20,000 with a website designer to develop the site;

- He has already spent DKK 15,000 on a market study that told him that once established, demand would be about 250 carvings per month, although in the first year sales would start at only 50 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 DKK 1,100 per carving (ignore any impact of sales taxes in your calculations);

- Packaging and shipping in Denmark would average DKK 35 per carving, and Erik is not currently 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 Erik one week after the end of each calendar month;

- He believes that one person could run the Danish operation part-time at a total cost (including

employer's social charges) of DKK 15,000 per month;

- Erik believes that if necessary he could borrow up to an additional DKK 200,000 at 8% p.a.;

- Erik'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.

Erik also has a friend, Laura, who runs a small chain of gift shops in the Copenhagen area. Laura is interested in the venture and has agreed that if Erik would mount a carving on an engraved wooden plinth, she would buy fifty such mounted carvings from him per month (which would be in addition to the internet sales outlined above, and would start immediately), at a price of DKK 1,000 each.To do this Erik would need to buy-in plinths costing DKK 15

each, and purchase a small automated router costing DKK 9,000.He would also hire a part-time assistant specifically to assemble these products at an additional cost of DKK 10,000 per month.

Erik 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 an analysis while he is away to help him with the decision, making clear any assumptions that you make (excluding the content of exhibits, headings, etc), (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 Erik could offer Eye4Detail as an upfront fee for the exclusive rights for the five year period (which would not include any carvings) 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;

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

Erik 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.