To analyse, explain and plan financial decisions under a range of different scenarios
Task 1
STAYPETAL is a retail chain that specialises in premium garden flowers and homegrown vegetables; and operates 800 stores in the UK. The company’s sales have fallen behind its competitors as it currently does not offer its customers an online shopping service. It is considering a proposal to establish an online shopping service using the technology of ODAMO LTD, an existing online retailer.
Sales revenue and gross profit
The number of customers using the online delivery service in the first five years is estimated to be as follows:
Year 1 250 000 customers per week
Year 2 270 000 customers per week
Year 3 300 000 customers per week
Year 4 320 000 customers per week
Year 5 330 000 customers per week
Customers are expected to spend an average of £95 per week. Delivery to customers will be free of charge. The expected gross profit margin is 18 per cent of the selling price.
Loss of existing in-store sales
It is estimated that 12 per cent of customers purchasing online would have purchased in store if the online facility was not available. The sales revenue per customer and gross profit margin on online sales will be the same as that for in-store sales.
Capital expenditure
At the start of the project, STAYPETAL will purchase a specialised fleet of delivery vehicles costing £15 million. The vehicles will have a useful life of eight years and will be depreciated on a straight-line basis. They will have no residual value at the end of the eight-year period. The vehicles will be eligible for tax depreciation.
Contract with the online retailer
The contract with ODAMO LTD will be for an initial period of 5 years.
Prior to the 5 year period starting, STAYPETAL will pay £230 million to buy one of ODAMO LTD’s existing warehouses. At the same time, STAYPETAL will also invest £150 million to adapt the warehouse to store flowers and vegetables. Part of the upgraded warehouse will then be leased back to ODAMO LTD for five years for a fee of £16 million per annum. The cost of purchasing the warehouse and the expansion costs will not be eligible for tax depreciation.
The warehouse will have a realizable value of £270 million at the end of the five years.
STAYPETAL will pay 1.5 per cent of gross profit from the online business to ODAMO LTD. STAYPETAL will also pay a fee of £30 million per annum to license the technology and as a contribution towards ODAMO LTD’s research and development costs.
Other operating costs
The online operation will result in additional costs in the first year of £35 million, including delivery costs but excluding depreciation. This amount will rise by £6 million each year as the customer numbers increase.
Taxation
STAYPETAL’s financial director has provided the following taxation information:
● Tax depreciation: 20 per cent per annum of the reducing balance, with a balancing adjustment in the year of disposal.
● Taxation rate: 25 per cent of taxable profits. Half of the tax is payable in the year in which it arises, the balance is paid in the following year.
● STAYPETAL has sufficient taxable profits from other parts of its business to enable the offset of any pre-tax losses on this project.
Other information
● A cost of capital of 10 per cent per annum is used to evaluate projects of this type. Ignore inflation.
Task 2
There are many crowdfunding websites such as Kickstarter, Indiegogo and Crowdcube. Some new businesses obtain funding through these websites. You should visit the crowdfunding websites mentioned and identify one interesting new business idea to invest. You should provide a brief background to the selected business.
Assume your team represent a venture capital (VC) firm which invests in small innovative businesses. The VC company aims to accelerate the growth opportunities of these innovative businesses. You should divide your group members into two teams.
Required:
One team should evaluate possible business strategies to develop the selected business further, identifying advantages and disadvantages (pros and cons) of this new business idea.
The second team should prepare a cash flow budget that considers the implementation of these business strategies. The cash flow budget should be prepared for twelve months. You should identify possible cash surplus or external funding needs based on your cash budget. You should make appropriate recommendations to improve the cash position of the selected business.
