Uncle Matt - Decision making

You have been asked by your 60 year old uncle Matt 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 conference call with Europe, 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 estimates for some of the analysis. 

Matt lives in New Jersey and recently took early retirement (from a company he joined 35 years ago), and left the company with a lump sum payment of $350,000. Surprisingly, rather than being depressed by his new state of independence, he is excitedly contemplating a new career as a retailer of traditional cuckoo clocks. He is confident that he can set up a business to import the clocks from southern Germany and sell them in the USA. His wife, whom 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 Uncle Matt you have assembled the following information from him: 
- A college friend, Manfred, in Germany owns a company making clocks and is prepared to give him exclusive rights to sell their products in the USA; 

- The clock that would be sold in the US retails in Germany for €400; 

- Manfred's firm would sell clocks to Matt at a 50% discount to their European price; 

- The firm would ship to Matt on receipt of payment for each order; 

- Matt has found out that shipping to New Jersey from Germany would cost €30 per clock (paid in advance) and that shipment from the factory to him would take one week; 

- Matt plans to order from Germany fortnightly and intends to maintain a minimum stock of two weeks worth of sales to ensure that he will be able to maintain supply to customers; 

- He will buy a computer, printer and racking equipment at a cost of $4,000, and has found a small industrial unit nearby that he can rent at a cost of $1,000 per month; 

- Matt intends to sell by internet only, and is planning to spend $5,000 with a website designer; 

- He has already spent $10,000 on a market study that told him that once established, demand will be about 600 clocks a month, although in the first year sales would start at 40 clocks in the first month before building up to the full level at the end of the first year; 

- The above study assumed a selling price of $400 per clock; 

- The study also examined the potential for a higher price of $450 per clock, and concluded that unit sales at that price would be halved; 

- Based on the study Matt is confident that he could achieve the higher price by some customisation, such as applying special decals, which he could do himself and which would cost $30 per clock. This would also require him to purchase a hot stamp press at a cost of $750; 

- All clocks would be packed for shipment to the customer in the US at a cost of $15; 

- All sales would be by credit card, with the credit card company taking 1% per sale and remitting the total to Matt on the15th of every month; 

- He believes that one person could run the operation and hopes to do so himself, paying a salary of $7,500 per month; 

-Matt's marginal tax rate on investment or earned income is 30%; 
-If necessary Matt believes he could borrow up to $100,000 at 8% p.a.; 
- If he goes ahead, Manfred has asked Matt to cover the cost of refurbishing or replacing some of the clock tooling in Germany. 

Matt believes that he could invest his redundancy lump sum at 5% per annum and therefore suggests that you use 5% as the after tax discount rate for a discounted cash flow analysis. 

Matt has asked you to prepare an analysis to help him with his 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 25 pages, and should include: 

- A summary of all assumptions and estimates that you have made for your analysis, including justifications where appropriate; 

- Monthly cash flow in the first year of operation; 

- Annual cash flow thereafter; 

-Any sensitivity analysis that you think would be helpful; 

- The amount which Matt could offer Manfred to cover the refurbishment costs which would leave him no better or worse off after five years than if he did not undertake the venture; 
- Conclusions and recommendations. 

Matt 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 business school students have it a lot easier than we did in our day, what with computers and the internet to help". 

Your report should demonstrate skills of critical reflection, effective communication and balanced judgement. The final assessment will account for 70% of your overall grade for this module. Submission is by the end of Sunday August 25th, (Swiss time), despite any other dates that may be shown on the Syllabus. 

Scripts that are excessively long (i.e. exceeding the limit by more than 10%) will not be read beyond the point of the word limit; there is no minimum word limit. Do not put your name on the paper. 

The overall structure should be as follows:

1. Cover Page (1 page)

2. Table of Contents/List of Exhibits (1 page)

3. Main Report (within range of words, see above) 
4. Exhibits (if any) 
5. References/Bibliography 

Please mail us at mailurhomework@gmail.com for the solution.