DuoLever Limited: Financial Analysis & Recommendations ACC00716

This assignment presents a financial analysis of DuoLever Limited's investment options, specifically focusing on whether to include the production of recycled sachet plastic or license a patented method. The analysis employs annual cash flows and net present value (NPV) to evaluate the feasibility of each option, considering factors such as initial investment, sales revenue growth, interest expenses, and variable costs. The findings indicate that licensing the patented method (Option 2) yields a higher NPV and annual cash flows compared to producing recycled sachet plastic (Option 1). The report recommends that DuoLever Limited consider the quality of materials from Clean World Limited and suggests implementing a quality audit team to mitigate potential risks. Ultimately, the analysis supports the selection of Option 2 based on its superior financial performance and potential for maximizing firm value.

Running head: BUSINESS CASE STUDIES 2
Business Case Studies 2
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1BUSINESS CASE STUDIES 2
Table of Contents
1. Spreadsheet financial analysis of the proposed options:........................................................2
2. Memo:....................................................................................................................................3
References:.................................................................................................................................8

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1. Spreadsheet financial analysis of the proposed options:

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2. Memo:
Memorandum
To: The CEO of DuoLever Limited
From: The Manager
Date: 15.05.2019
Subject: Analysis of the proposed options
The memorandum is prepared with the intent to provide a meaningful insight of the
two proposed options, which are available to the management of DuoLever Limited. This is
because the organisation is in a dilemma of whether to include production of recycled sachet
plastic to its portfolio of businesses or it should license use of the patented method.
Therefore, both financial and non-financial aspects have been taken into consideration for
analysing the two proposed options available to the organisation.
Explanation and justification of the chosen methods:

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The methods chosen to analyse the feasibility of the two options include annual cash
flows and net present value (NPV). If an organisation has adequate profit on paper, it would
not assist in keeping the employees working or suppliers delivering materials when they
could not be paid timely (Rossi 2014). Moreover, an inability to fill orders would lead to
rumours about the organisation and the customers would intend to find a new supplier. Thus,
cash flows are crucial in terms of undertaking significant investment decisions (Almarri and
Blackwell 2014). NPV is chosen because it takes into account the time value of money. In
addition, both before and after cash flows are considered over the project life, while
providing priority to profitability and risk. Finally, it assists in maximising the value of the
firm (Andor, Mohanty and Toth 2015).
Inputs and assumptions made:
In case of the first option, which is to include production of recycled sachet plastic, it
is observed that DuoLever Limited has to invest $20 million for purchasing plant and
equipment expected to have an estimated life of five years with no scrap value after the
project completion. The assumptions made in this option include increase in sales revenue by
4% from the second year and this would be supplemented by additional revenue growth
owing to the benefit of recycled packaging. For financing plant and equipment, the
organisation would obtain a five-year debt that would result in annual interest expense of
$1.4 million to be paid at the end of each year. Moreover, due to the minimised energy costs
by the use of environment-friendly materials, the overall variable packaging costs presently
estimated at $22 million would be lowered by 15% in the initial year of the project. Although
there would be reduction in variable costs by additional 15% through avoidance of a supplier
margin, it is not considered, since the same would be offset by the requirement of paying a
new partner. This would ultimately result in the existing forecasts. Depreciation expense is

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deducted from revenue to arrive at profit after tax, after which it is added back to compute the
annual cash flows.
For the second option, there is no requirement of investing in plant and equipment,
since it is related to licensed use of the patented method. As a result, the organisation does
not have to bear the burden of initial investment at the start of the project (Baum and Crosby
2014). Therefore, DuoLever Limited only has to incur the material supply costs and annual
general, selling and administrative expenses for this option. Moreover, there is no need for
any additional production administration cost. Furthermore, it would be able to retain the
expected benefits in sales revenue as in the case of the first option. In both the options, the
WACC and tax rate are estimated to be 8% and 25% respectively.
Summary of findings:
The above tables mainly help in representing the annual cash flows and net present
value of the two options. It could be seen that the annual cash flows for the first option are
deemed to be lower compared to the annual cash flows for the second option. This is mainly
due to the absence of depreciation expense, finance costs and lower annual general, selling
and administrative expenses in the second option. Since the organisation does not have to
purchase plant and equipment, if it chooses the second option, there would no expense related
to depreciation and finance cost through issuance of debt (DeFusco et al. 2015). By analysing
NPV, it could be seen that the second option has higher NPV amounting to $608.00 million
compared to the NPV of the first option amounting to $584.81 million. A higher and positive
NPV is always desirable for an organisation, as it aids in maximising the firm value
(Daunfeldt and Hartwig 2014). Thus, in terms of both NPV and annual cash flow, investment
in the second option is deemed to be feasible.
Recommendations and follow-up measures:

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In terms of NPV and annual cash flows, both options are viable for investment from
the viewpoint of DuoLever Limited owing to positive values. However, if only one option is
to be selected, the second option is more profitable compared to the first option because it has
higher NPV and yearly cash flows (Hoesli and MacGregor 2014). However, there are certain
other actions that have to be considered by the management of DuoLever Limited before
making the final decision.
One of the significant uncertainties associated with the investment decision in case of
selection of the second option is the quality of materials to be used by Clean World Limited.
This is because if the supplied materials are not of superior quality, there would be fall in
expected benefits in sales revenue. The customers might be switching to the other suppliers
for quality products and as a result, there would be decline in overall profitability to be
generated from the project. For dealing with this uncertainty, DuoLever Limited has to
develop a special team that would audit the supplied materials of Clean World Limited. In
case; if the quality does not meet the standard, appropriate measures should be taken like
inspecting the production sites of Clean World Limited for ensuring the expected sales
benefits and profitability to be generated from the project (Sullivan and Mackenzie 2017).

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References:
Almarri, K. and Blackwell, P., 2014. Improving risk sharing and investment appraisal for
PPP procurement success in large green projects. Procedia-Social and Behavioral
Sciences, 119, pp.847-856.
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of
Central and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Daunfeldt, S.O. and Hartwig, F., 2014. What determines the use of capital budgeting
methods?: Evidence from Swedish listed companies. Journal of Finance and
Economics, 2(4), pp.101-112.
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E.,
2015. Quantitative investment analysis. John Wiley & Sons.
Hoesli, M. and MacGregor, B.D., 2014. Property investment: principles and practice of
portfolio management. Routledge.
Rossi, M., 2014. Capital budgeting in Europe: confronting theory with practice. International
Journal of Managerial and Financial Accounting, 6(4), pp.341-356.
Sullivan, R. and Mackenzie, C. eds., 2017. Responsible investment. Routledge.