Question 7 Your firm is considering the acquisition of a brand, and they have identified two prospects, Brand A' and 'Brand B'. Research has determined that the brands will yield future cash flows as stated in Table 2: laure: Future Cash Flow Projections Brand A -$170,000.00 Brand B -$125,000.00 $ 79,000.00 Year 0 1 $ 26,000.00 2 $ 45,000.00 $ 62,000.00 3 $ 79,000.00 $ 41,000.00 4 $ 81,000.00 $ 35,000.00 Figure 4: Net Present Value Formula Ct N NPV = (1+r) Where t=0 N- Total time over which the earnings is projected t-Time of the cash flow r-Discount rate Ct-Net cash flow at time t Further, whichever brand is selected for acquisition, your firm wants a 15% return. The management of the firm seems inclined to acquire Brand A because its revenue is steadily increasing while the opposite is true for Brand B. You are the Brand Manager for your firm and they have asked for your assessment. i. Do you agree or disagree with your management's inclination towards acquiring brand A? Support your answer with sound mathematics, using the Net Present Value formula given in Figure 4. Show your workings. ii. Although the Net Present Value Formula in Figure 4 is widely used to calculate brand value, it has been criticized by some as having certain shortcomings. What are these shortcomings and how might you improve the formula?

Marketing

20th Edition

ISBN:9780357033791

Author:Pride, William M

Publisher:Pride, William M

Chapter19: Pricing Concepts

Section: Chapter Questions

Problem 6DRQ

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Transcribed Image Text:Question 7 Your firm is considering the acquisition of a brand, and they have identified two prospects, Brand A' and 'Brand B'. Research has determined that the brands will yield future cash flows as stated in Table 2: laure: Future Cash Flow Projections Brand A -$170,000.00 Brand B -$125,000.00 $ 79,000.00 Year 0 1 $ 26,000.00 2 $ 45,000.00 $ 62,000.00 3 $ 79,000.00 $ 41,000.00 4 $ 81,000.00 $ 35,000.00 Figure 4: Net Present Value Formula Ct N NPV = (1+r) Where t=0 N- Total time over which the earnings is projected t-Time of the cash flow r-Discount rate Ct-Net cash flow at time t Further, whichever brand is selected for acquisition, your firm wants a 15% return. The management of the firm seems inclined to acquire Brand A because its revenue is steadily increasing while the opposite is true for Brand B. You are the Brand Manager for your firm and they have asked for your assessment. i. Do you agree or disagree with your management's inclination towards acquiring brand A? Support your answer with sound mathematics, using the Net Present Value formula given in Figure 4. Show your workings. ii. Although the Net Present Value Formula in Figure 4 is widely used to calculate brand value, it has been criticized by some as having certain shortcomings. What are these shortcomings and how might you improve the formula?

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