ACC00716 Finance - DuoLever Limited - Case Study Assignment Help

Memo

Duolever limited is a personal care manufacturer, currently packaging all its products in non-biodegradable plastic or multi-layer sachets. In order to improve on its packaging efficiency, the company invested in research revolving around the use of recycled sachet wastes to manufacture flexible plastic packages. The proposed new product is unmatched in terms of industrial energy consumption and product quality. Compared to the production of new plastic sachets, the proposed recycling process has the potential for saving up to 83% energy. Its quality is such that other than just being used for packaging Duo lever’s products it is suitable for use in the food industry, leaving a notion that it is usable in packaging almost every market product without raising a question of hygiene. 

In order to make maximum use of this new discovery, Duo lever limited is currently considering taking one of two available options; one is to include the production of the recycled sachets and the other being the issue of production patent to another company. While each of these options has its pros and cons, a detailed examination of the two options, as provided below, would offer an ultimate resolve on the most viable of the alternatives.

1. Addition of production of recycled sachets in Duolever Limited’s Investment Portfolio

1. Cost of investment

In order to evaluate the viability of an investment portfolio, the first consideration would be its cost. In order to add production of recycled sachets to the investment portfolio of the fir, Duo lever would get a loan, of $ 20 million, payable in five years. The loan would earn an interest of 7% each year, which would be paid annually at the end of each period and the total principal amount paid at the end of the five years. As calculated in option A evaluation worksheet on excel, the future value of the $ 20 million needed as the initial cost of investment for this option would be $27 million. 

Appendix 1

1. Return on investment

Appendix 2

As shown in the screen shot above, assuming that the annual income from the investment is equal to the increased revenue after investment (2% for five years thus 0.4% per year) the company would yield a return on investment of 17%. Since the compounded cost of capital employed is 8%, the net cash flow from the investment would thus be 9% (17% -8%). 

1. The net present value of an investment

Appendix 3

Using the interest rate changed on loan as the prevailing market rate of return, and the calculated annual cash flow as the portion of the total 2% increment on revenue earned each year, the calculated Net Present Value of the investment would be -17.1219 which is -85.6% of the initial investment.