Assessment of BelChok Opportunity Academic Essay.

You have been asked by your 59 year old neighbor, Mark, to help him assess a new venture. He is about to go on vacation so you need to rely on your own assumptions and estimates for the analysis.
Mark lives in Quesada, Costa Rica, and recently took early retirement and left the company with a lump sum (tax paid) payment of 240 million Costa Rican Colón (CRC). Mark is thinking about 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 Belgium and sell them in Costa Rica. Even though Costa Rica grows cacao, there is a thriving market for foreign chocolate within the country. Mark’ wife, who he met at business school in the USA, 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 Mark you have assembled the following information from him:
– BelChok SA (owned by a classmate from university), an established manufacturer of fine Belgian chocolates, is prepared to give him exclusive rights to sell their products in Costa Rica for a five year period in exchange for an upfront payment for the rights;
– The chocolates retail in Belgium for an average of 60 EUR per kilogramme, and BelChok is prepared to sell the chocolate to Mark at a 40% discount to this price;
– BelChok would ship to Mark on receipt of payment for each order;
– Mark has found out that freight from Belgium via air courier would cost on average EUR 7 per kg and that the time from him placing an order to receiving the goods in Quesada would be three weeks (including the factory time in Belgium);
– Mark plans to order from Belgium monthly (to maximise the shelf life in Costa Rica) 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 2.3 million CRC.to keep the products in good condition, and has found a small industrial room he can rent nearby at a cost of 250,000 CRC per month (payable monthly in advance, plus an initial three month deposit);
– Mark will sell the products throughout Costa Rica by internet only, and is planning to spend 1.1 million CRC with a website designer to develop the site;
– He has already spent 1.8 million CRC on a market study that told him that once established, demand would be about 500 kg a month, although in the first year sales would start at only 200 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 40,000 CRC per kg (ignore any impact of sales taxes in your calculations);
– Packaging and shipping in Costa Rica would average 1,500 CRC per kg, and Mark is not intending to charge that to the customer;
– All sales would be by credit card only, with the credit card company taking 0.5% per sale and remitting the monthly balance to Mark five days after the end of each calendar month;
– He believes that one person could run the operation at a total cost (including social charges) of 310,000 CRC per month;
– Mark has found out that, if necessary, he could borrow up to an additional 50 million CRC at 6% p.a.;
– Mark’ 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 for a return after tax of 3% per annum.
Mark also has a friend, Sarah, who runs a small chain of delicatessens in the Quesada area. Sarah is interested in the venture and she has suggested that if it goes ahead Mark could package chocolates in boxes decorated with views of Belgium, and she would commit to buy one hundred boxes per month (each containing 550 gm of chocolates) from him (which would be in addition to the internet sales outlined above, and would start immediately), at a price of 10,500 CRC each. To do this Mark would need to buy-in boxes and wrapping paper at a price of 600 CRC per box and hire an assistant specifically to pack and deliver the boxes, at an additional cost of 90,000 CRC per month.

Mark remembers discussions on discounted cash flow analysis at business school (although he admits that he did not fully understand it, 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; the analysis should not exceed 4,000 words (excluding the content of exhibits, headings, etc), or a total of 30 pages (everything included), and should include:
1. A summary of all assumptions and estimates that you have made for your analysis, including justifications where appropriate;
2. A break even analysis;
- A Balance Sheet at start-up (to show the initial capital) and at the end of the first year
- A Profit and Loss Statement for the first and second years;
- 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;
3. The most that Mark could offer BelChok as an upfront fee for the exclusive rights for the five year period which would leave him no better or worse off than if he did not undertake the venture, and the amount you suggest he should actually offer them;
4. Conclusions and recommendations;
5. A critical reflection of the analysis that Mark has asked you to prepare – what, if anything, would you do differently in a financial analysis of this opportunity, and why?