UCBS7037 : Financial Management - Colada Geodes - Finance Assignment Help

Assignment Task :

Final Assessment 

You have been asked by your 65 year old aunt Hattie 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 where appropriate.  

Hattie lives near Manchester, England, and recently took early retirement (from a university she  joined 30 years ago), leaving them with a lump sum (after tax) payment of £450,000.  Surprisingly, rather than being depressed by her new state of independence, she is tired of the  bureaucratic life and excitedly contemplating a new career as a retailer of geodes1and other  decorative stones. She is confident that she can set up a business to import geodes from Uruguay and sell them in Europe. Her husband, who she met in the USA 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  viability.  

After a couple of hours with Hattie you have assembled the following information from her:  - Colada Geodes, an established supplier of geodes and similar stones based in Artigas (and  owned by one of Hattie’s university colleagues), is prepared to give her exclusive rights to sell  their products in the UK for a six year period in exchange for an upfront payment for those  rights;  

•  The geodes sell in Uruguay for an average of 350 Uruguayan Peso (or $U for short) per kg,  and Colada Geodes is prepared to sell them to Hattie at a 45% discount to this price; 
• Colada Geodes would ship to Hattie on receipt of payment for each order; 
• Hattie has found out that freight from Artigas to Manchester, via Montevideo by truck and air  freight, would cost on average $U 200 per kg and that the time from her placing an order to  receiving the goods in Manchester would be four weeks (including the preparation and packing  time in Uruguay);  
•  Hattie plans to order from Colada Geodes monthly and intends to maintain a minimum stock  of one month’s worth of sales to ensure that she will be able to supply a suitable range of  products to customers;  
•  She will buy a special jig and tools at a cost of £ 3,500 to break open and polish the geodes,  and has found a small industrial room she can rent nearby at a cost of £ 300 per month (payable  monthly in advance, plus an initial security deposit of three months rent, refundable at the end of  her tenancy if there is no damage); 
•  Hattie will sell the geodes throughout the UK by internet only, and is planning to spend  £ 4,000 with a website designer to develop the site;  
•   She has already spent £ 3,000 on a market study that told her that once established, demand  would be about 750 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 of £ 35 per kg (ignore any impact of sales  taxes in your calculations);  
• Packaging and shipping in the UK would average £ 5.50 per kg, and Hattie is not intending to  charge that to the customer; 
•  All sales would be by credit card, with the credit card company taking 1.2% per sale and  remitting the monthly total to Hattie two weeks after the end of each calendar month;
• She believes that two part-time students could run the geode operation at a total cost to her  (including employer’s social charges) of £ 1,500 per month;  
• Hattie believes that, if necessary, she could borrow up to an additional £ 40,000 at 7% p.a.; 
• The effective overall marginal tax rate on income from a company set up to undertake this  activity would be 28%, payable one year in arrears; Hattie has also told you that she can invest  any available cash at an after tax 3% per annum. 

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