NPV Analysis DUOLEVER LTD - Business Case Study

Memorandum

To: DuoLever CEO

From:

CC:

Dated: 19th May, 2019

Subject: Evaluation of Production Option and Outsource Option

DuoLever has found a new and efficient method for recycling sachet waste that has negative environmental impact and is adding up in world production of plastic. This recycling method is efficient and will save energy usage by upto 83%. The major issue being faced by DuoLever is to decide whether to add production of recycled sachet plastic to company’s portfolio or license the use of its patented method to Clean World Ltd. This memo is presented with evaluation of both options using Net Present Value budgeting method.

In response to the environmental impact of plastic ending up in landfills, oceans and rivers, DuoLever has found an efficient way of recycled sachet plastic production. In order to produce the soft plastic, DuoLever has two options, the first one requires it to invest into machinery that could produce the recycled plastic sachets while the second option allows it to partner up with Clean World Ltd. and allow it to produce sachets for DuoLever. The table below shows the income statement of DuoLever when none of the options are taken on board based on the following data:

Sales revenue will grow at 4% per year after first year sales of $200 million.
Variable cost will grow at 3% per year after first year cost of $22 million.
Selling and administration cost will be $1 million throughout 5 years.
Tax rate is 25%

The forecasted income statement is as follows:

BASIC INCOME STATEMENT OF DUOLEVER
	Year 1	Year 2	Year 3	Year 4	Year 5
Sales Revenue	200.00	208.00	216.32	224.97	233.97
Variable Cost	(22.00)	(22.66)	(23.34)	(24.04)	(24.76)
Selling and Administration Cost	(1.00)	(1.00)	(1.00)	(1.00)	(1.00)
Income Before Tax	177.00	184.34	191.98	199.93	208.21
Tax	(44.25)	(46.09)	(48.00)	(49.98)	(52.05)
Net Profit	132.75	138.26	143.99	149.95	156.16

Discussion

The above analysis shows an increasing net profit for DuoLever Ltd. in case it doesn’t choose any of the options.

Income Statement in Option 1:

INCOME STATEMENT FOR OPTION 1
	Year 1	Year 2	Year 3	Year 4	Year 5
Sales Revenue	204.00	212.16	220.65	229.47	238.65
Variable Cost	(18.70)	(19.26)	(19.84)	(20.43)	(21.05)
Cash Operating Expenses	(3.00)	(3.00)	(3.00)	(3.00)	(3.00)
Depreciation	(4.00)	(4.00)	(4.00)	(4.00)	(4.00)
Lease Payments	(1.40)	(1.40)	(1.40)	(1.40)	(1.40)
Operating Income Before Tax	176.90	184.50	192.41	200.64	209.20
Taxes on Operating Income	(44.23)	(46.12)	(48.10)	(50.16)	(52.30)
After Tax Operating Income	132.68	138.37	144.31	150.48	156.90

The above analysis is done using following data:

Sales will further grow at 2%
Variable cost will reduce by 15%
Lease payments of $1.4 million annually will be made on loan used for funding purposes.
Selling and administration cost will rise by $2 million annually
Depreciation will be 20% on straight-line basis on $20 million cost
Tax rate will be 25% and discount rate will be 8%