Assessment 3: Business Case Studies 2 ACC00716 S1 2019
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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 fictitious1
, 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 graph3
:
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
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.
Assessment 3: Business Case Studies 2 ACC00716 S1 2019
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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
Assessment 3: Business Case Studies 2 ACC00716 S1 2019
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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 Help 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 2 ACC00716 S1 2019
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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)
Business Case Studies 2
By (Name)
Course
Professor
University
Physical Address
Date
MEMORANDUM
TO: CHIEF EXECUTIVE OFFICER, DUOLEVER LTD
FROM: PROJECT MANAGEMENT DEPARTMENT
DATE: May 18, 2019.
SUBJECT: INVESTMENT OPTIONS
This is to inform you on behalf of the project team that we have evaluated the two investment options for the recycling system and developed a report for the best investment option. Two investment option is evaluated using the current base case, then investment option 1 which involves the purchase of new equipment and machinery as well as investment option 2 which involves the licensing of a patented recycling method of Clean World Ltd. The report discloses, the assumptions, methods, findings, recommendations and conclusion on the two investment options.
Assumptions
General assumptions
The investment options were evaluated through a time value of money using the weighted average cost of capital of the company of 8%.the income taxes rate was the rate for locally registered companies at the rate of 25%. The investment options are evaluated for a useful life of five years with no salvage value for all cases.
Base case assumptions
The annual revenue remains constant at $200 million, and there is no expected future growth. The variable costs remain constant at $22 million the entire project life. There is no depreciation, and interest expenses but the selling, general and administrative expense that will be incurred were $2 million which remain fixed.
Investment in new equipment and machinery
The initial outlay cost is $20 million, which is to be used up within the five years of the project. Depreciation is estimated on a straight line basis for every accounting year but is added back to obtain net cash flows (Ball et al., 2016, pg.28). The revenues are expected to grow at an annual growth rate of 4%. Also, there are recycling benefits which are expected to increase the revenues from investment into the new machinery. The company makes cost savings of 10% in energy costs and 10% for the supplier margin in raw materials. The variable costs are expected to grow at 3% every year.
Investment in patented recycling methods
The revenues are expected to remain the same as the investment in new equipment and machinery. The costs will increase at 3% annually with energy cost savings are offset with supplier margin utilised in the provision of materials. The selling, general, and administrative expenses reduced to $2 million. There is no initial capital outlay as the project involves the use of existing plant and machinery.
Methods
The investment appraisal of the two options involved the use of net present values and discounted cash flows. The profitability index was also estimated, but both the base case and option 2 could not yield a profitability index since there was no initial capital outlay. Net present value approach was used since it allows for the comparison of the present value of cash flows with the initial cost to determine the change in value. The projected with the highest net present value is selected since it is the most viable to invest (Widhiwaluya and Faisal, 2016, pg.15).
Findings
The investment appraisal established that investment in new equipment and machinery results in high net present value compared to the base case and the use of a patented recycling method. The net cash flows of the investment option 1 are higher compared to the base case, which has constant annual net cash flows, while option 2 has low net annual cash flows. Also, the first investment options have more cost savings compared to the base case and the second investment option even though it incurs more selling, general, and administrative costs. The second investment option has higher variable costs; this is why there are low net cash flows. The analysis further showed that investment into a new plant and machinery results in a higher profitability index of 30.91. The table below shows the net present value and profitability index performance of each investment option (Azizurrofi, 2017, pg.1).
Investment option Net present value (NPV) Profitability Index (PI)
Base case $527,037,724.89 –
Option 1 $598,212,797.32 30.91
Option 2 $596,338,081.09 –
Table 1: Summary of findings on net present value and profitability index of each option
Conclusion and Recommendations
DuoLever Ltd needs to invest in the new plant and machinery. The investment option results in a higher net present value of the net cash flows. Also, the project has a higher profitability index of 30.91, which means the project ranks higher in terms of investment, and its cash flows are likely to generate higher returns in the future. Therefore, the decision is to invest in new equipment and machinery since projects with higher net present value and profitability index are considered for investment.
Moreover, DuoLever Ltd needs to invest in option 2 since the project results in high-cost savings in both energy costs and supplier margin. Therefore, this shows this will help the company in improving sustainability as a result of the reduction in energy costs (Pombo et al., 2016, pg.284). All in all, investment in new equipment and machinery is the most viable project as there are high net cash flows, net present value, and profitability index.
References
Azizurrofi, A., Firdaus, R.R., Akbar, W.J., Adisatria, A.R.I.N.G.G.A., Asnidar, A.S.N.I.D.A.R., Iskandar, A.R.I. and Misfaroh, Z., 2017, April. Economic Analysis of Profitability Index and Development Cost Based on Improved Oil Recovery (IOR) Projects in Indonesia. In IOR 2017-19th European Symposium on Improved Oil Recovery.
Ball, R., Gerakos, J., Linnainmaa, J.T., and Nikolaev, V., 2016. Accruals, cash flows, and operating profitability in the cross-section of stock returns. Journal of Financial Economics, 121(1), pp.28-45. Taxation Law Homework Help
Pombo, O., Allacker, K., Rivela, B., and Neila, J., 2016. Sustainability assessment of energy saving measures: A multi-criteria approach for residential buildings retrofitting—A case study of the Spanish housing stock. Energy and Buildings, 116, pp.384-394.
Widhiwaluya, D.N., and Faisal, F., 2016. Analisis Determinan Earnings Management. Diponegoro Journal of Accounting, 5(4), pp.15-24.
