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Case and Requirements
In 2020, Mr. Pep, the chairman, founded FoodPlanet PLC. Th
Case and Requirements
In 2020, Mr. Pep, the chairman, founded FoodPlanet PLC. The company specialises in
providing wholesale services to independent retailers, caterers, and businesses, with a
strong commitment to improving customer service. However, the grocery industry is
experiencing a surge in technological advancements due to increased consumer demand for
online grocery shopping and more personalised advertising. As a result, the company′s sales
have sharply declined, primarily due to external competition. The absence of an online
platform has made it challenging for the company to meet the demand for online shopping.
Fewer customers are visiting physical stores to purchase food, leading to a drop in sales. To
boost sales and foster growth, the company has introduced more discounts and offers for its
customers. Nevertheless, the decline in the company has affected profitability margins and
has had a significant impact on its borrowing capacity, ability to repay the interest on its
debts, and cash flow.
To foster competition and establish the online branch, Mr. Pep is contemplating securing
financing to expand the online retail operations and procure products. Given the company′s
financial position and the inherent risks associated with entering a new online market, this
move entails risks for both short-term and long-term growth, as operating an online e-retail
store will impact the financial structure and profitability. Initially, a substantial cash flow is
anticipated for the online branch, driven by customer interest in the range of products and
competitive wholesale prices. Consequently, the company can anticipate a significant
increase in future sales and profits. Furthermore, the company is expected to have a greater
amount of liquid assets and cash flow than originally projected. Nevertheless, the
management acknowledges the need to secure short-term financing for this new project.
Following consultations with specialists in the online grocery retail sector, the management
team has forecasted the cash flows from online sales for the next five years. The anticipated
cash flows are as follows:
year 1 year 2 year 3 year 4 year 5
Projected
sales (£)
250,000 400,000 550,000 550,000 800,000
This projection outlines a gradual increase in online sales revenue, reflecting an expected
growth and stabilisation in the online grocery market.
Establishing the necessary online processing software will incur an immediate cost of
£4,000, and this software is expected to have a useful life of five years. The installation of a
new online network by the internet service provider requires a one-time payment of £6,000,
plus an annual line rental fee of £1,600. For online deliveries, a fleet of new delivery vans,
costing £250,000, is required. These vans can be financed over a five-year period with a
40% down payment. The financing for the vans is available through a bank loan at a 5%
interest rate, compounded yearly, resulting in yearly payments of £34,647.22.
The company plans to hire part-time van drivers, offering a total annual salary of £5,000 for
all drivers. The vans have a useful life of five years and will be depreciated on a straight-line
basis over this period. The salvage value of the vans after five years is estimated to be 25%
of their total cost. Using the straight-line method for depreciation, the annual depreciation
expense on the company’s income statement is calculated at 20% of the annual depreciation
allowance.
The annual expense for maintaining the vans and for insurance is projected to be £3,000.
The company′s weighted average cost of capital is calculated at 8%. An anticipated shift in
customer behaviour from physical to online shopping is expected to result in a £430,000
annual decrease in sales from physical grocery stores.
The financial advisor anticipates no significant inflation over the next five years and,
consequently, has excluded inflation from the projected figures. The company currently
carries some debt and is not publicly listed on the stock market. Should the proposal be
implemented, additional financing will be necessary. However, the financial advisor has not
specified a preferred method for acquiring this additional finance.
REQUIREMENT FOR REPORT:
Adress the following three questions in relation to the case in a 3,000-word report.
Desсrіption Weighting
Q1 Prepare a schedule of cash flows for the project. Calculate, using the
information available, the net present value of the proposal to sell
online shopping and run an online store. Include in your answer a
justification for whether or not you recommend FoodPlanet to go
ahead with this proposal.
In this question, you are required to critically discuss the effect of the
cost of capital on financial decisions.
35%
Q2 Calculate the payback period for the proposed project to run an
online store, if the company has a policy of only accepting projects
with a payback of less than three years, would this be accepted?
Comment on the suitability of the payback method for the new
investment and comment on how to develop an appropriate payback
year for the new project.
35%
Q3 Identify potential issues of cash flow for the proposed online
expansion of the e-grocery business and discuss various methods of
financing to support this project.
20%
Presentation and referencing
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