Spotify wants to conduct what is known as sensitivity analysis for a new subscription scheme. Sensitivity analysis
Question:
Spotify wants to conduct what is known as sensitivity analysis for a new subscription scheme. Sensitivity analysis involves the calculation of Net Present Value and Internal Rates of Return under different scenaria about the inputs (amounts and parameters) of the project ceteris paribus, i.e. simulating (calculating) NPV and IRR for different values of a selected variable. Users can pay an extra subscription fee to have access to live-streamed gigs via the platform, and the company wants to assess which price would be more suitable under different assumptions about users, revenues and costs over a 5-year horizon. Cloud costs, tech infrastructure development, etc amount to 50 mil. USD of initial investment. Spotify expects 3 mil. subscribers in the first year and estimate user growth at 10% for every year after Y1. The subscription fee is set to 7 USD, artist royalties are 30% of annual revenues, administrative and management costs are fixed at 5 mil and the wages of newly hired staff that will work on the scheme are 3 mil per year, increasing by 5% per annum after Y1. All cash flows are nominal, annual and end-of-period, there is no depreciation or inflation, the corporate tax rate in Sweden is 20% and the opportunity cost is 7%.
The company wants to assess NPV and IRR over a range of varying subscription fees and users (i.e. these are the only two amounts that change in the sensitivity analysis). The range of fees is from 3 to 15 USD while the range of subscribers is from 1 to 5 mil. Construct a table that reports the NPV for different combinations of fees and subscribers ceteris paribus (you are free to select the interval/ step) and another table for the IRR for the same combinations.
Discuss the results and whether the proposed subscription fee is an improvement over the company’s current activities (Hint: look up Spotify’s Return on Equity).
Foundations Of Finance
ISBN: 9780134083285
9th Edition
Authors: Arthur J. Keown, John H. Martin, J. William Petty