Question

Problem 2:

Jason Taylor, CEO of Royal Connection Inc. (RCI) must decide important matters with quick. Some time ago, suddenly, Jason got an offer from Aberdeen Inc. (AI) to buy the company. RBI and AI are already playing in the market butter cookies for a very long time. However, they sell products to different market segments. Butter cookies from AI under the brand name "Yummy" included in the cheap snack category. Fairly profitable; However, the margin is not of. Butter cookies from RCI under the brand name "Royal". Currently, AI is experiencing financial difficulties in the case of Cash Flow. Because of this, they plan to sell company.

RCI holds a 30% market share of butter cookies in value butter. AI holds 40% market share in value. Because Royal is 50% more expensive than Yummy, then in terms of units / quantities, Royal's market share is only 20%. Jason was challenged by shareholders to be more aggressive, especially in get a bigger market share. Therefore, they plan to launched a new brand "Excell" that will compete with "Yummy" head to head on the market for cheap butter cookies. Following are additional information about "Yummy" and "Excell" for consideration You.

The book value of the AI ​​factory is zero. Therefore, no depreciation expense on profit claims. Over the past 5 years, "Yummy" profit is approaching 1,000 USD and is expected to get a profit of 1,000 USD starting next year so on. Yummy ad elasticity is very good at 0.3. AI spent 50 USD per year for advertising costs. Because they have difficulty in cash flow, by therefore additional spending on advertising will be difficult. Their profit margin is 10% AI is considering accepting offers from RCI based on assumptions the same profit for the next 10 years from cash in.

For RCI, if they launch "Excell" they have to invest 500 USD in years 1 to 4 and 200 USD for the year thereafter. They expect to get 230USD profit in the first year, 300USD in the second year and 350USD in the third year. From year 4 to year 8, their profits will be 450 USD; and the year after, profit is expected to reach 500 USD. Investment for launching "Excell" is much smaller than buying AI. On the other hand, Jason is quite optimistic that if they buy AI and spend it an additional 50 USD per year for ad spend, they can increase sales "Yummy" and that can justify investment in AI purchases. Your job as a Business Development Manager is to help Jason create decision. "Buy" or "Don't Buy and Launch a new product". Assume for investment calculations, the duration / length of time the investment calculation is for 20 years. And assume there are no other factors that influence improvement sales other than the addition of sales due to the addition of advertisements. Discount rates are applied by RCI for investment calculation is 10%.

Question:

1. If Jason, spend an additional 50USD each year on iklan Yummy ”ads, with a 10% profit margin, calculate the profit that the company can get as cash in.

2. Based on the information above, what is the asking price from AI?

3. Assume the same advertising costs and profits will be valid for 20 next year, do the calculation by comparing the two options (buy or launching new products). Based on the calculation, what could be there suggest to Jason? "Buy" or "Launch New Product"? Give a table calculations, decisions and reasons for your decision.

Answer 1

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