ACC00716 Finance - Assessment 3 - Business Case Study 2

To: Chief Executive Officer

Re: DuoLever Limited analysis for Investment in Plant or License technology based on research and development

Introduction

This memo includes the recommendation of the investment option to be exercised by the DuoLever Limited after the discovery of new and efficient method of recycling sachet waste. DuoLever Limited has the option to either add production of recycled sheet plastic to Company’s Portfolio of Business or license the use of technology to Clean World Ltd. Net Present Value (NPV) has been used as an investment appraisal tool to analyse both options for this project.

Option 1: Investment in Plant and Equipment to add production of recycle sheet plastic to Company’s Portfolio of business.

DuoLever by adopting to invest in an in-house production facility which would lead to an initial investment of $20 million. This investment would be beneficial for five years after which the technology would become obsolete and the salvage value of the investment would be zero. Subsequently, DuoLever has to find and adopt for a better green alternative. DuoLever will ensure that the in-house production facility must be developed before starting of the operations of the next year in order to get the maximum yield from this investment before the obsoleting of this newly developed technology.

DuoLever will use debt to acquire plant, because the debt rate is 7% which is 1% smaller than the 8% required rate of return of the investors. This would lead to a finance cost of $1.4 million every year. Reason for Debt rate to be so high of 7% is because of the higher operational risk due to new technology.

Adopting new technology would result in an expected 2% increase in Revenue per year of $22.5 million other than the estimated 4% normal increase in revenue of $35.7 million. Normal increase in revenue has been estimated from the past trends but the 2% increment in sale for the new technology has been estimated after considering the consumers respond to green products and the market share of the DuoLever in developed countries as compared to developing countries.

Variable cost would be shaved by 15% per annum and will help to save cost of about $18 million but this will be subject to whether DuoLever would be able to achieve the economies of scale in order reach this level and whether it would be able to deduct its energy usage by 83%. Anticipated growth in cost of 3% is also assumed in variable cost as been derived from the past trends and being rationale about the future energy costs.

Increasing the portfolio of business would lead to an incremental fixed administrative expense of $2 million. DuoLever must have to bear this cost as the potential benefits of adopting this project is far better than the incremental cost due to additional administration requirements.

Cost of Capital of 8% is used as per the market required rate of return of investors for companies having similar operations. Tax rate of 25% has been used as it is anticipated that this constant rate of 25% will not be changed in next five years.

Adopting for this option to open a plant and add production of recycled plastic sheet will increase the shareholder’s wealth by $664,169,238 in the next five years and therefore is considered to be a healthy investment.