DuoLever Limited: Financial Report on Packaging Investment Options

This finance memo presents an analysis of two options for DuoLever Limited regarding recyclable packaging. The company invested in research and development for soft plastic recycling. Option 1 involves setting up a new plant, costing $20 million, with a 5-year life and forecasted sales growth. The benefits include increased sales and reduced variable costs. Option 2 involves patenting the recycling method to Clean World Ltd., with estimated production costs and sales. The report analyzes the financial implications, including revenue, costs, taxes, and profit after tax for both options over a 5-year period. Based on the analysis, the report recommends Option 2 as the more profitable choice, avoiding additional costs such as interest and depreciation associated with Option 1. The memo references key financial concepts and provides a clear recommendation for the board of directors.

FINANCE

MEMO
To: Board of directors DuoLever Limited
Form: Finance Managers
Finance is an important factor which is needed by every business organisation to support its
business operations (Gitman, Juchau and Flanagan, 2015). It is very important for a business to
be socially and environmentally responsible for its operations to produce the goods which does
not harm the environment. DuoLever Limited deals in personal care products which includes
skin, hair and beauty products in its product line, it sells its various products in multi layer plastic
packings and sachets. In order to be environmentally responsible it carried out a research and
invested around $50 million in soft plastic recycling research, development and pilot testing.
This has help it reduce its energy usage by 83%. Following are the two decisions which currently
company faces.
OPTION 1
Company has an option to set a new plant for producing a recyclable packing for its
product. The new investment will cost around $20 million to bring up a new plant and equipment
which will be depreciated to zero book value and its estimated life is for 5 years. The total
forecasted company's sales revenue for the year is $200 million and is expected to grow every
year by 4%. The benefit which the company will receive after using its recycled packaging
system is expected to raise its forecasted sales by 2% during the life of its project.
The second benefit which the company has is its reduction in cost of packing its existing
product. The cost which is incurred by company in purchasing virgin plastic is more costlier than
the recycled plastic due to low energy cost (Hirshleifer, 2015). The reduction in the energy cost
will reduce the total variable cost by 15%, at present without using the recycled packaging
company incurs approx $22 million and it is expected to grow in the coming year by almost 3%
every year. If the company uses its own production plant to provide recyclable packaging it can
reduce its cost by 10% by avoiding its suppliers. Total cost which will be incurred by the
company for 5 years is estimated at 26.10 million, 26.66 million, 27.24 million, 27.83 million
and 28.45 million respectively, which will result in the expected profit before tax earned in 5
year is estimated as 173.90, 185.34, 193.24, 201.47 and 210.02 million respectively. Total tax
payable for the 1st year is estimated at 43.48, 46.33 for 2nd year, 48.31 for 3rd year, 50.37 for the
4th year and 52.51 for the 5th year. This option will increase the cost of interest which is to be
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paid to investors financing the new plant and the depreciation which provided on the new plant
and equipment.
OPTION 2
The second option which DuoLever has to patent their new recycling method to another
company. Clean World Ltd will purchase its licence and agreed to sell the recyclable plastic
exclusively to DuoLever with the existing cost of existing virgin plastic (Cochrane, 2017). The
total estimated cost of production under this methods was estimated at 23 million for the first
year and is continued to grow by 3% every year resulting in the total cost for next year at 23.66
million in the year 2, 24.34 million in the year 3, 25.04 million in year 4 and 25.76 million for
the year 5. Estimated sale for 1st year is 200 million and is expected to grow by 4% every year
resulting 208 million in the next year, 216.32 million in year 3, 224.97 in year 4 and 233.94 in
year 5 the total expected profit before tax the company will earn in this option is estimated as
177 million for year 1, 184.34 in year 2, 191.98 in year 3, 199.93 in year 4 and 208.21 for the
year 5. Total tax which will be applicable for 5 year is estimated as 44.25 for 1st year, 46.09 for
2nd year, 48.00 for 3rd year, 49.98 for 4th year and for the 5th year tax applicable is 52.05. the profit
after tax earned by DuoLever for next 5 year is estimated as 132.75, 138.26, 143.99, 149.95 and
156.16 respectively.
After the analysis of both option available for the company it can be recommended that
company should adopt the option 2 as the profit which is expected from 1st option is significantly
more than the option 1 and it will also reduce the cost of production as compared to option 1. the
company should go for the option 2 as it will not attract any additional cost such as interest and
depreciation which is provided in the option 1.
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REFERENCES
Books and Journals
Gitman, L. J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Hirshleifer, D., 2015. Behavioral finance. Annual Review of Financial Economics. 7. pp.133-
159.
Cochrane, J.H., 2017. Macro-finance. Review of Finance. 21(3). pp.945-985.
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