Deutsche Brauerei

Deutsche Brauerei

Summary

In 2001, Ukrainian sales were 28% of Deutsche Brauerei's total sales following a sales increase of 47% in 2000. To take advantage of this trend, the firm has considered investing in expanding operations. The first phase of expansion would be the construction of a new plant. The second part of the project would be to build a warehouse in the Ukraine to improve their distribution channels. We computed the net present value (NPV) for three scenarios: the construction of both buildings, building only the manufacturing facility, and if the firm does neither. In each NPV analysis, we included three levels of success based on predicted sales; an aggressive, base, and worst case. After computing the different NPVs, we found that not constructing either facility provides the safest range of NPV's. However, all scenarios examined had a positive NPV. The NPV of building both facilities, assuming the aggressive level of sales growth, provides the highest NPV. The credit terms need be more consistent. Ukrainian customers take a longer time to pay because they do not have the capital, nor will a bank loan them the funds due to the risk of that market. While we are sympathetic to the new entrepreneurs, we must draw the line somewhere. The credit terms for the Ukraine should be 2/10 net 60. The next decision to be made is how to pay Oleg Pinchuk due to his substantial contributions to the company. His base pay should be increased to €48000. His incentive pay will be a percentage of the sales that are actually received by corporate headquarters. For instance, if we receive a certain percentage of accounts receivable, Oleg will receive a certain portion of sales. If corporate receives a lower collection rate, than his percentage of sales will be lower. Lastly, the dividend will remain at 75%. This is more than enough to satisfy shareholders without dipping in to our sales revenue.

Introduction

Deutsche Brauerei has sought expansion into Ukraine as its product is reaching maturity in Germany. In 1998 venturing into the new markets started with immediate success and accounted for almost €4 million in sales the first year. Oleg Pinchuk, a native to the Ukrainian beer market, brings an aggressive attitude towards the expansion. Pinchuk decided the best course of action to initially enter the market is to provide financing to willing entrepreneurs with no available capital and set up distribution centers throughout Ukraine. He did this by extending our credit terms from 2/10 n/40 to 2/10 n/80 and wants another 10 day extension to put collectibles at 90 days, claiming bad debt will only amount to 2%. These credit terms mean we may not collect any money for an entire quarter, clearly warranting a second look.

Expansion into a new market and production capacity being met in early 2001, the new budget for 2001 calls for an investment of €7 million in new plant and equipment and for 2002 another €6.8 million for a warehouse and distribution center in Ukraine. Also to keep the Schweitzer family happy, Lukas wants to keep the dividend payout at about 75% and pay a forth of those dividends during the current quarter. Based on Pinchuk's projected net income in 2001 dividends to be paid this quarter would be €698,000 with total dividends being €2,793,000 at year end. These are two more examples why our credit terms need to be adjusted and Pinchuks financials given another look. The projected numbers could inevitably impact how we decide to finance these new projects and whether or not we can afford to undergo the investments as a whole. Pinchuk's compensation is currently €82,344 with €40,000 as his base salary and the other half coming from an incentive program which pays 0.5% of annual sales increases in Ukraine (€41,440). Lukas wants to increase his pay because of his success in Ukraine.

Scenarios Analysis

A factor in deciding whether to invest in the plant expansion and distribution center is whether or not the projects have positive net present values. If the investments have a positive NPV then we can accept the projects. First we needed to forecast the company's future cash flows by projecting out sales and expenses to come up with the operating profit. We determined the sales growth projections by looking at Pinchuk's forecasts as being aggressive. With this in mind we came up with a conservative and average forecast to give multiple perspectives. To see the figures we used for sales growth rate, see Figure 1 in the appendix. A couple notable sales growth estimates are as follow. Our sales growth for the base forecast in accepting both projects was 30% in 2001 and 15% in 2002. The rationale for this was the credit terms needed to be lowered from 80 days to 60 days for customers in Ukraine. This will cause a decline in the sales forecast as some customers might feel like they cannot pay back in time. Our base sales growth projection for accepting only plant expansion was 30% in 2001 and 5% in 2002, because we are not building the new plant in 2002 which will have growth in sales take a small dive in 2002. Lastly, our base sales growth projection for not accepting either of the projects was 2.30%