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Business Case Studies Assignment

Question:
Prepare a spreadsheet financial analysis of the proposed options and 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.

Solution:

To the CEO of Duolever,

Duolever is a company that manufactures skin care and other similar type of product. Currently it is suffering from poor Corporate Social Responsibility. Over the years, it has noticed the growing use of plastic and it is looking for methods to reduce the use of new plastic and looking for alternative method. This company is looking for ways to make sustainable product for the consumers. It is looking for better environment friendly method to conduct its business. Yours of research has resulted in the better and more sustainable mode of production. However, this company is having two different option and they are struggling to choose from any one of the below twooptions. This discussion is focused in the Duolever company's sustainable mode of business and it will decide which of the below two option will help the company to gain good revenue from the market.

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Choice one

In case the company chose the option one, it will be choosing to manufacture and produce the packaging for the product under its own company's risk and reword. It needs around $20 million as a starting investment on the machinery and plants. However, it will be depreciated at an alarming rate and will hit the value zero after five years. The plant and machinery will be fully equipped to deal with the growing demands of the company (Bockenet al., 2014). The below table is based on the depreciation of plant and machinery.

money invested in plant and machinery

end of the year 1

16,000,000

end of the year 2

12,000,000

end of the year 3

8,000,000

end of the year 4

4,000,000

end of the year 5

0

Table one

The above table represents the value of machinery and plant

The interest cost of the machinery is somewhat around $1.4 million a year, which is payable at the end of the year. Every year the company is losing around $4 million under straight-line method of depreciation. Making the self-reliability on production of recyclable plastic sound unprofitable and unrealistic.

The company will be highly benefited from reducing the new plastic use. It is looking for capturing a higher amount of recyclable product within the country. The sales revenue of the Duolever Company will likely to be increased due to using the recyclable product based on the information provided. The company is hoping to score a $200 million in the upcoming year and the figure is likely to go high by 4% every year after. The use of recyclable plastic will likely to increase the company's revenue by 2% within the next five years. The below table will discuss the figures of the next couple of years.


fixed amount of return

4% increase in every year

expected return in first year

200000000

8000000

expected return in second year

208000000

8320000

expected return in third year

216320000

8652800

expected return in fourth year

224972800

8998912

expected return in fifth year

233971712

9358868.48

Table 2

The above table shows the amount of money this company will make in the upcoming 5 years

Note (the amount of money by inducting sustainable packaging is not added)

2% increase in the next 5 years

total amount after 5 years

238651146.2

233971712

Table 3

The above table represent the increase in revenue due to induction of recyclable plastic.

The company is making around $(238651146.2 - 233971712) = $ 4,679,434.2. Amount of revenue just by inducting the recyclable mode of plastic. Note (the money is not the profit amount it is the amount of revenue and other cost is not calculated).

One of the other benefits of using this mode of plastic is a significant reduction in cost of packaging reduction. The reduced energy cost is estimate=ted to save around 15% of the packaging cost. In other words, it is going to save around $(22,000,000 × 15/100) = $ 3,300,000 in a year. However, for upcoming year it is likely to increase by 3% every year after such period if supplier margin is reduced by 10%. The clean world limited company as a new partner is hoping to supply the required raw materials for recyclable plants.

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Choice two

The option two is very much different than option one and it is very much simpler too. Under this option, the company will provide its license to a third party to produce the required packaging from their company. This option helps the company to stay away from the burden of buying the equipment and manufacture the packaging materials for its product. This method demands the Clean World Limited to make the production of the packaging. The Duolever Company will pay for the cost of production and will incur the general expenses of $1 million every year.

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Comparison and Conclusion

The option one allows the company to have the control over the production of the packaging materials. When it comes to option two, all of it goes away. Under option one, the company can use the production of packaging materials as a semi- variable cost. However, in option two it becomes a fixed cost for the company. The company's choice of going into the fixed cost of their packaging materials with good licensing policy will only result in loss of control over the packaging materials. The company is likely to make a significant amount of profit based on the forecast of the company. However, if the 8% weighted average cost of capital is considered the company makes even a larger amount of money. The 25% of tax is not included in the calculation process.

Recommendation

The Duolever Company should choose option two because of its cost efficiency. Even though the company is incurring around one million of general cost every year, the company is still being benefited from option two (Rondinelli and Berry, 2000). Option two is not only cost effective but also allows the company to make its resource to concentrate on the other aspects of the business. Having to choose the option, two will only result in better and more welcoming revenue and profit.

Abstract









money invested in plant and machinery


total money invested

20,000,000



end of the year 1

16,000,000






end of the year 2

12,000,000






end of the year 3

8,000,000






end of the year 4

4,000,000






end of the year 5

0






























fixed amount of return

4% increase in every year





expected return in first year

200000000

8000000





expected return in second year

208000000

8320000





expected return in third year

216320000

8652800





expected return in fourth year

224972800

8998912





expected return in fifth year

233971712

9358868.48




























2% increase in the next 5 years

total amount after 5 years






238651146.2

233971712

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