Financial Analysis of Options for New Sachet Packaging

FINANCE
STUDENT ID:
[Pick the date]

MEMORANDUM
Date: May 17, 2019
To: DuoLever CEO
From: STUDENT NAME
Subject: Financial analysis of options pertaining to introduction of new sachet packaging
Dear Sir
The company has already developed this environmental friendly plastic which can be recycled. It
now needs to determine the best strategy to take this product to the market. There are two options
on the table in this regards. This memo aims to provide a financial analysis for each of these
options based on the incremental cost benefit analysis. Further, a recommendation has been
offered considering the financial analysis of the two options.
Financial Analysis – Own manufacturing unit
Before proceeding further, a key point needs to be made regarding $ 50 million investment in
development of the new plastic. This expense has already been incurred by the company and
thereby it has no relevance for the decision at hand. For the purposes of this analysis, it would be
treated as a sunk cost. The estimated benefits expected to arise form the given proposal are
summarized below.
 The recycled plastic is highly energy efficient and requires lower raw material which
would culminate in 15% variables cost decrease.
 Also, the environment friendly nature of the recycled plastic is expected to result in
higher sales from the consumers to the tune of 2%.
However, for manufacturing the sachets, it would be imperative that plant and equipment are
purchased which would require an expenditure of $ 20 million. During the project life,
depreciation would be available using straight line method till the book value becomes zero. This
would enable some relief in tax outflow. Further, additional costs to the tune of $ 2 million
annually would be incurred on account of selling, general and administrative expenses which

would hike on account of this project. Using the information provided along with cost of capital
(8%), the NPV calculations have been performed in the attached spreadsheet (Ehrhardt and
Brigham, 2016).
NPV for setting up own manufacturing facility has come out $1.35 million.
Sensitivity Analysis
The NPV above is not very high and considering that future estimates may deviate, sensitivity
analysis is pivotal to identify crucial factors. This is a useful tool which needs to be considered
especially since the actual figures for the given proposal may show an unfavorable deviation
from the expected value. The two key factors have been identified as the benefits which the
project is expected to provide. The table below indicates the adverse impact of changes in these
factors on the NPV computed above.