Dessert Valley brewery Limited Case Study Solution
1 Results from Financial Analysis
The analyst used several techniques to find out the feasibility of the Ferguson Proposal. These techniques include financial modeling, valuation of currency fluctuations through interest rate parity, and cost benefit analysis. Moreover, the analyst also used the concept of time value of money in order to identify the project in more appropriate manner.
1.1 Financial Modeling
The analyst used this technique and evaluated the project of Ferguson’s Foods; moreover, the analyst used the given data. The data indicated that Desert Valley (DV) would receive an upfront fee of 150,000 to start the project.
Afterwards, the company specified a range of projected demand of Ferguson foods. Moreover, the company made several terms and conditions with the project; the first condition was that the company will not be responsible for any excess inventory and the company can order additional goods and DV will be restricted to fulfill that order with in three working days.
Furthermore, the company will give a 15% discount on the excess production. Regardless of all the terms and conditions, the analysis suggests that the company can earn up to 894,000 CD from the proposal till 2018.
Moreover, when the analyst discounted the profits from the proposal, the findings revealed that the company could easily earn almost 1.6 million CD over the said time frame. Therefore, it can be concluded that Ferguson’s proposal is quite lucrative and can add significant value to the company.
1.2 Annual Domestic Sales
From the analysis, the investigator saw that the selling prices for beer would remain same until 20X10. Moreover, the demand was given in the data and using that data, the analyst reached the annual domestic sales of the company.
Afterwards, it has been noted that the company can earn almost 37 million in 2013, 37 million 2014, 42 million in 2015, and so on. However, in the last year, the company can earn almost 55 million CD. Furthermore, these sales are not interlinked with the project.
Therefore, there will be no impact of the project on these sales. Moreover, the analyst also saw that the company would sell almost 1.6 million cases of the product from 2013 to 2020. However, these projections were used by the given data and finally, the analyst also calculated the contribution margin of domestic sales, which was calculated as 35% of the sales.
Afterwards, the findings revealed that the company will be able to earn almost 13 million CD as contribution margin in 2013, while the contribution margin will follow the steady track of growth and will become almost 20 million in 2020.
Moreover, for better understanding the analyst also calculated the present value of the CM and found that the company can easily earn 10 million CD as CM in 2013, while it will grow to almost 4.4 million CD in 2020. However, the discounting has been made on 20% interest rate given in the data.
1.3 Impact of Currency Fluctuations
The analyst calculated the impact of currency fluctuations by using the interest rate parity formula to get the most appropriate answers. Furthermore, two scenarios were considered in the analysis; one is that if the CD strengthens in front of USD and the second is the weaker position of CD.
In addition, the findings suggested that if the CD strengthens, it would be less effective and less profitable for the company since, the company will have to receive less amount in exchange of CD. On the other hand, the second case suggested that if the position of CD weakens, then it would be more beneficial for the company. Since, the company will be able to receive more funds.
Moreover, the first case suggests that the company can earn almost 377,000 to 314,000 CD over the proposed time period of the project. However, the discount rate of the American economy was assumed 18% in the Interest Rate Parity Formula.
Finally, the last scenario suggests that the company can receive almost 417,000 to 347,000 CD, if the CD declines its value and USD becomes stronger. In a nutshell, it can be concluded that the company is exporting goods and in this condition, low home currency rates are more feasible.
2 Qualitative Analysis/Non-Financial Analysis
In this section, the analyst has evaluated the performance of the company as compared to its competitors and the internal competencies of the company. Moreover, the analyst also highlighted the accounting treatment of some crucial factors.
2.1 Accounting Treatment of Upfront Fee
The upfront fee is being paid in the first year of contract. Therefore, it will be considered as an inflow. For instance, the analyst used the upfront fee as inflow and added it into the first years profit and afterwards, the analyst discounted that amount on the given rate.
However, the upfront fee has several types of accounting treatment, since the nature of this head differs from situation to situation. In our case, the analyst considered it as income. Moreover, the account can be treated as deferred income. However, to keep the analysis simple, the analyst assumed it as income of the company.
Dessert Valley brewery Limited Harvard Case Solution & Analysis
2.2 Accounting Treatment of Currency Sales Transactions
The currency sales transactions will be treated in the same traditional way i.e. if the company profit from the weaker position of CD, this will be noted as translation gain or..................
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