MNOP Inc. is considering purchasing a rival brand (Brand C) for $1,000,000. The management has requested your assistance is gauging the feasibility of this move. The following information was supplied:

1. The estimated sales (units) for year 1 is given. The sales then increase in each succeeding year over the previous one by the percentages given.:-

	Yr 1	Yr 2	Yr 3	Yr 4	Yr 5
Sales (units) est.	50,000	20%	20%	25%	20%

1. Price per unit is $10 for the first three (3) years, then it is expected to increase by 30% in year 4 and remain unchanged in year 5 (same as year 4).

• Unit cost will be $4 for the first year but due to a trade union agreement slated for year 3, the new labour costs will result in a 30% increase in unit costs. The new unit costs will remain for the rest of the period involved.

1. Cost of capital: 12%
2. The Present Value Interest Factors (PVIF) based on a 12% cost of capital are:

	Yr 1	Yr 2	Yr 3	Yr 4	Yr 5
PVIF (12%)	0.893	0.797	0.712	0.636	0.567

1. Additional cost information:-
2. The company capital charge: 12%
3. Role of Branding Index: 77%
4. After year 5 earnings are expected to experience constant growth of 7%.
5. The relevant tax rate is 36%
6. Based on projections the initial investment will be $80,000 and each year will increase over the previous year by the percentages given below:

	Yr 1	Yr 2	Yr 3	Yr 4	Yr 5
Depreciation	15,600	15,600	15,600	15,600	15,600
Overheads ($)	45,000	55,000	60,000	70,000	80,000
Other	5,900	7,600	8,000	8,500	9,500

• The Marketing expense is estimated to be $120,000 in year 1 and decrease in each succeeding year over the previous one by 10%.

	Yr 1	Yr 2	Yr 3	Yr 4	Yr 5
Capital employed	80,000	110%	20%	5%	5%

Required:

Calculate the brand equity of the Brand C and advise MNOP Inc.

Answer rating: 100% (QA)

SOLUTION To calculate the brand equity of Brand C and advise MNOP Inc we need to consider the cash f... View the full answer