Assessing the Viability of a New Venture for Retailing Natural Pearls

Background of the Venture

You have been asked by your 59 year old father-in-law Felix to help him assess a new venture. It is Friday night, and he needs the work finished by Sunday, in preparation for an early Monday morning meeting, so you know that he will not be able to give you any more information than he already has (and you will be unable to contact him over the weekend), and therefore you should rely on your own assumptions and estimates for some of the analysis if necessary.

Felix, who was educated in London, now lives in Zurich, Switzerland, and recently took early retirement (from a chocolate firm he joined 25 years ago), leaving the company with a lump sum (after tax) payment of CHF 900,000. Surprisingly, rather than being depressed by his new state of independence, he is excitedly contemplating a new career as a retailer of natural pearls. He is confident that he can set up a business to import pearls from Tahiti and sell them in Zurich. His wife, who he met at business school, is pleased with his passion for this possible new venture but concerned that it might turn into a financial disaster. She has suggested that he develop a financial plan to evaluate the venture and its viability.

 

After a couple of hours with Felix you have assembled the following information from him: Orohena Pearls (owned by a business school roommate of Felix), an established supplier of Tahitian Pearls, located close to Pape’ete in Tahiti, is prepared to give him exclusive rights to sell their products in Switzerland for a six-year period in exchange for an upfront payment for those rights;

Single, undrilled, pearls sell in Tahiti for an average of 14,800 XPF each and Orohena Pearls (OP) is prepared to sell them to Felix at a 35% discount to this price (XPF is the international code for CFP francs the currency used in Tahiti and other parts of French Polynesia)

• OP would ship to Felix on receipt of payment for each order
•  Felix has found out that air freight (including insurance) from OP via courier would cost on average XPF 1,800 per pearl, and that the time from him placing an order to receiving the goods in Zurich would be three weeks including the preparation and packing time in Tahiti he would also have to pay the courier cost to OP on ordering