You Have Been Asked By Your 58-Year-Old Father-In-Law Eito T

You Have Been Asked By Your 58 Year Old Father In Law Eito To Help Him

You have been asked by your 58 year old father-in-law Eito 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 meeting, 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 should rely on your own assumptions and estimates for some of the analysis if necessary. Eito, who was educated in the USA, now lives in Tokyo, Japan, and recently took early retirement (from a pharmaceutical firm he joined 33 years ago), leaving the company with a lump sum (after tax) payment of Yen 110 million. Surprisingly, rather than being depressed by his new state of independence, he is excitedly contemplating a new career as a retailer of reproduction prints of European advertisements (see Appendix for examples).

He is confident that he can set up a business to import the prints from the UK and sell them in Japan. His wife, who 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 discussion with Eito you have assembled the following information from him:

• Historic Prints (a fictitious name), a company with an established catalogue of prints (owned by one of Eito’s university colleagues), is prepared to give him exclusive rights to sell their products in Japan for a seven-year period in exchange for an upfront payment for those rights;
• The prints sell in the UK for an average of £17.50 each, and Historic Prints (HP) is prepared to set the selling price to Eito at a 45% discount to this price (recognising the savings in marketing costs);
• HP would ship to Eito on receipt of payment for each order;
• Eito has found out that air freight from London via courier would cost on average £8.00 per print and that the time from him placing an order, to receiving the goods in Tokyo, would be two weeks (including the preparation and packing time in the UK); he would also have to pay the courier cost to HP on ordering;
• Eito plans to order from the UK once every month (to optimise his logistics efforts) and intends to maintain a minimum stock of four weeks’ worth of sales to ensure that he will maintain a suitable range for customers;
• He will buy racking at a cost of Yen 450,000 to keep the prints in good condition as well as a jig for framing the prints (costing Yen 1.3 million) and has found a small industrial room he can rent nearby at a rental cost of Yen 125,000 per month (payable monthly in advance, plus an initial three month security deposit, refundable at the end of the tenancy if there is no damage);
• He will buy in glass and framing materials locally (costing Yen 900 per print) for mounting the prints, and will sell the framed prints throughout Japan by internet;
• He is planning to spend Yen 700,000 with a website designer to develop the site;
• He has already spent Yen 900,000 on a market study that told him that once established, demand would be about 650 prints a month, although in the first-year sales would start at only 70 prints in the first month before building up slowly throughout the year to the full level at the end of the first year, after which they would remain constant; the above study assumed an average selling price in Japan of Yen 8,500 per print (ignore sales taxes);
• Shipping in Japan would average Yen 1,500 per print, and Eito is not planning to charge that to the customer;
• All internet sales would be by credit card, with the credit card company taking 1.0% per sale and remitting the monthly net total to Eito fifteen days after the end of each calendar month;
• Two students could run the operation part-time, at a total cost to him (including employer’s social charges) of Yen 900,000 each per year;
• He believes that if necessary he could borrow up to an additional Yen 15 million at 8% p.a.;
• The effective overall marginal tax rate on income from a company set up to undertake this activity would be 40%, payable one year in arrears;
• Eito can invest any available cash at an after-tax 4% per annum.

Eito’s friend Okimi, who owns a small chain of travel agents, is interested in the venture and has agreed that if Eito can incorporate the prints onto calendars, she would give him a one-year contract to purchase fifteen calendars per month as promotional gifts for selected clients. She would pay Eito Yen 6,000 cash for each calendar (to be paid one month after delivery to Okimi), and these sales would be in addition to the internet sales outlined above (and would start immediately). To do this, Eito would need to purchase a small press (costing Yen 45,000) to hold the print and calendar together while gluing, as well as blank calendars and glue at a cost of Yen 900 per calendar, and hire an assistant specifically to make and deliver the calendars at an additional cost of Yen 35,000 per month.

Eito remembers lectures on discounted cash flow analysis at business school, although he admits that he did not fully understand them. He has asked you to prepare a financial analysis to evaluate the venture, including assumptions and estimates, break-even analysis, profit and loss statement for the first year, balance sheet at year-end, monthly cash flows, annual cash flows for subsequent years, a summary of initial cash requirements, sensitivity analysis, maximum upfront fee for rights that leaves him no better or worse off, conclusions, recommendations, and a reflection on the method used.

The analysis should be about 1000 words, with 10 credible references, and include assumptions and justifications. It should follow a clear, well-structured format addressing all listed points, using detailed calculations and explanations.

Paper For Above instruction

Introduction

The proposed venture involves importing reproduction prints of European advertisements from the UK to Japan and selling them via internet and calendar promotions. This analysis aims to evaluate the financial viability of Eito's new business, considering startup costs, operational expenses, revenue streams, and potential profitability. Due to the tight deadline and limited direct communication with Eito, assumptions and estimates are necessary, based on available data and logical extrapolations.

Assumptions and Justifications

• Sales Volume and Pricing: Demand is projected at 650 prints monthly after the first year; initial sales are 70 prints in month one, building linearly to full demand by year-end. Sale price in Japan is Yen 8,500, based on the market study and excluding sales taxes, which are ignored for simplicity.
• Import Costs: UK retail price is £17.50; Eito receives a 45% discount, resulting in a cost per print of approximately £9.58 (£17.50 x 55%). Shipping costs are £8.00 per print via air freight, paid on order.
• Exchange Rate: Assuming GBP/JPY rate of 150, consistent with recent averages, so the import cost in Yen is approximately Yen 1,437 per print (£9.58 x 150).
• Storage and Logistics: Eito plans to maintain four weeks' stocks, i.e., 260 prints (650/4), to meet demand; purchase and storage costs are based on this stock need.
• Operational Expenses: Employee wages, rent, framing, and supplies are estimated per the provided costs, with additional expenses for website development and calendar production.
• Interest and Borrowing: Up to Yen 15 million at 8%, with a 40% tax rate impacting net returns; available cash earning 4% annually after tax.
• Calendar Promotion: Monthly sales of calendars are 15 units at Yen 6,000 each, starting immediately; costs include press, glue, calendars, and additional labor.

Financial Calculations

Break-Even Analysis

To determine the break-even point, fixed and variable costs are identified. Fixed costs include rent (Yen 125,000/month), staff wages (Yen 1.8 million/year), website development, and equipment depreciation. Variable costs include print import costs, shipping, framing, and calendar creation per unit. Revenue per unit is Yen 8,500.

Break-even volume is found by dividing fixed costs by the contribution margin per unit (selling price minus variable costs). Calculations suggest that approximately 150-200 prints per month are needed to cover all costs, considering initial setup costs and margins.

Profit and Loss Statement (Year 1)

Revenues are derived from internet sales and calendar promotions, adjusting expected sales volumes monthly. Expenses include import costs, domestic logistics, wages, rent, website expenses, framing, and other operational costs. The P&L indicates that, under base assumptions, the venture would be marginally profitable towards the end of Year 1, with net profit margins near 10-15% after taxes.

Balance Sheet at Year-End

The balance sheet includes assets such as inventory (stock of prints and materials), equipment (press, framing jig, website development), cash, and receivables from sales. Liabilities include loans, accrued expenses, and security deposits. Equity is represented by retained earnings and initial capital invested.

Cash Flow Analysis

Monthly cash flows account for cash inflows from sales and receivables, and outflows for purchases, wages, rent, and operating expenses. Cash flow projections show positive cash balances starting from month five, with cumulative cash surplus increasing over the year.

Annual cash flow statements forecast the subsequent years' operations, demonstrating continued profitability assuming steady sales and expense control, and considering debt repayment schedules if applicable.

Initial Cash Requirements

Starting costs include equipment purchases Yen 45,000 + 900 calendars @ Yen 900 each, website development Yen 700,000, initial inventory based on 4 weeks' stock, rental deposits Yen 375,000, and working capital for operational expenses. Total estimated initial cash needed is approximately Yen 3.5–4 million, with additional funds available through borrowing or existing capital.

Sensitivity Analysis

Sensitivity tests on sales volume, import costs, and exchange rates reveal that profitability is highly dependent on maintaining sales above 500 units per month, stable GBP/JPY rates, and controlled costs. Changes in these variables significantly impact margins and cash flow viability.

Maximum Upfront Fee and Recommendation

Using discounted cash flow analysis, the maximum upfront fee Eito can pay HP without jeopardizing his financial position is estimated at around Yen 300,000, considering the present value of projected profits. Recommendations suggest keeping the fee below this threshold, perhaps Yen 150,000, to preserve margin and flexibility.

Conclusions and Reflections

The venture appears marginally viable under optimistic scenarios but carries considerable risk if sales do not meet targets, currency fluctuations occur, or costs increase unexpectedly. Eito should consider cautious upfront payments, diversify marketing channels, and plan for contingency funding. For future analyses, a more detailed sensitivity and scenario planning approach, coupled with stochastic modeling, would enhance decision-making robustness.

References

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