QUESTION 2: Study Unit 2 - Forecasting in the marketing environment

THIS QUESTION IS BASED ON THE WASHED WATER CASE INFORMATION PROVIDED BELOW.

Washed Water Limited is a technology manufacturer that produces water purification products for businesses.

Washed Water is embarking on extensive new product development and a marketing drive to grow the business. The company needs to compile its three-year forecast.

The following information is known:

The forecast period is from 2021 to 2023 (three years).

The current sales (2020) of 3 600 units are expected to grow by 13% each year.

Product development costs of R14,2 million have been incurred in 2020 and will be capitalised over the forecast period.

Washed Water requires a minimum net present value (NPV) of R65 million to satisfy its shareholders.

The WACC of Washed Water is 16%.

Advertising in 2021 is expected to be R3 800 000.

Operating expenses are expected to be R18 700 000 in the first year of expansion.

The inflation rate is expected to remain constant at 4% per year over the forecast period. The inflation rate is used to forecast all cost and expense increases.

The average selling price in 2020 is set at R48 000 per unit. The company intends limiting the selling price increase to the inflation rate plus 2% every year. The products gross margin in 2020 is 35%.

The corporate tax rate is 28%.

Required:

Important note: Round off all monetary calculations to the nearest rand and all percentage calculations to two decimal places.

1. 2.1One dimension of quantitative information in forecasting is timing. Explain how this dimension applies to the Washed Water forecast, using an example of this dimension from the case information. Substantiate your example. (3)
2. 2.2Forecast the sales demand (number of units) for each of the years (2021, 2022 and 2023) for Washed Water.

2.3 Using your answer from Question 2.2, forecast the total contribution and the profit before tax for Washed Water for each of the years (2020, 2021 and 2022).

1. 2.4Calculate and state whether the forecasted contribution calculated in Question 2.3 will reach the required after-tax NPV of future cash flows.
2. Show all calculator inputs and workings. (6)
3. 2.5Ignoring your answer in Question 2.4, if the calculated NPV is R75 million, calculate the sensitivity of the variable costs to the NPV if the NPV cannot fall below R65 000 000. Explain what your calculated answer means. (5)
4. 2.6You have been asked by Washed Water to interpret some marketing metrics from research data that will assist with its referral marketing strategy. You will be presenting the results to the board of directors of Washed Water.
5. The available data indicates that out of a sample of 350 customers in 2018, 240 customers are willing to recommend products to other customers, and in 2019, out of a sample of 480 customers, 295 are willing to recommend. The survey used a binary 'yes/no' scale answering the statement: 'I am willing to recommend Washed Water products to other companies'.
6. Calculate and interpret the relevant customer-related marketing metrics from the available data. Your interpretation needs to be sufficiently comprehensive with recommendations to present to the board of directors. (7)