Jason Taylor, CEO of Royal Connection Inc. (RCI) has to decide on
important matters quickly. Some time ago, suddenly, Jason got an offer from Aberdeen Inc. (AI) to buy the company. RBI and AI have been playing in the butter cookies market for a very long time. However, they sell products to different market segments. Butter cookies from AI with the brand "Yummy" included in the category of low-priced snacks. Fairly profitable; However, the margin is not as big. Butter cookies from RCI under the brand name "Royal". Currently, AI is experiencing financial difficulties in terms of Cash Flow. Because of this, they plan to sell the company.
RCI holds a 30% market share of butter cookies in value butter. AI holds a 40% market share in value. Because Royal is 50% more expensive than Yummy, in terms of units / quantity, Royal's market share is only 20%.
Jason was challenged by shareholders to be more aggressive, especially in gaining greater market share. Therefore, they plan to launch a new brand "Excell" that will compete with "Yummy" head to head in the low-priced butter cookies market.
Here is additional information about "Yummy" and "Excell" for your consideration.
The book value of the AI factory is zero. Therefore, there is no depreciation expense on profit claims. Over the past 5 years, "Yummy" profits have approached 1,000 USD and are expected to earn 1,000 USD from next year onwards. Yummy ad elasticity is very good at 0.3. AI spends 50 USD per year on advertising costs. Because they have difficulty in cash flow, therefore additional spending on advertising will be difficult. Their profit margin is 10%. AI is considering accepting offers from RCI based on the same profit assumption for the next 10 years from cash in.
For RCI, if they launch "Excell" they must invest 500 USD in years 1 through 4 and 200 USD for the year after that. 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 profit will be 450 USD; and the year after, profit is expected to reach 500 USD. Investment to launch "Excell" is far less than buying AI.
On the other hand, Jason is quite optimistic that if they buy AI and spend an additional 50 USD per year on ad spending, they can increase "Yummy" sales and that can justify investment in AI purchases.
Your job as a Business Development Manager is to help Jason make decisions. "Buy" or "Don't Buy and Launch a new product".
Assume for the calculation of investment, the duration / length of time the investment calculation is for 20 years. And assume there are no other factors that influence sales increase other than the addition of sales due to the addition of advertisements. The discount rate applied by RCI for investment calculations is 10%.
-If Jason, spend an additional 50USD each year on Yummy ads with a profit margin of 10%, calculate the profit that the company can get as cash in.
-Based on the information above, what is the asking price from AI?
-Assuming the same advertising costs and profits will be valid for the next 20 years, do the calculation by comparing the two options (buy or launch a new product). Based on these calculations, what can you suggest to Jason? "Buy" or "Launch New Product"? Give the calculation table, the decision and the reason for your decision.