MRK704 – Financial Aspects of Marketing

The Marketing Business Case II

Base Case Adjustments

It’s now June 15, 2020. Bob Morton has returned from yet another meeting with the
CEO, Richard Jones, to discuss his financial analysis of their potential new product.
Richard continued to be very interested in the idea but wanted to see a few more
changes to the analysis. These are the changes that were discussed during the meeting:

a) The household growth rate would be 1.25% per annum

b) The penetration rate in 2021 would be 8.5%
c) The penetration rate would rise by 200 basis points in 2022 and 2023 and would
then increase by 125 basis points in the subsequent years (additive values)

d) Units purchased (Average number of purchases per household) would increase by

0.4 units each and every year after 2021

e) Market share would start at 10.75% and would follow the previous projection of
increase by 100 basis points in 2022 and 2023 but would then decrease by 50 basis
points (.5%) in 2024 and then by 25 basis points (.25%) in 2025 (additive values)

f) The initial selling price would be $12.99

g) The selling price is forecasted to increase by 200 basis points (2.0%) annually after
2021
h) The Cost Goods Sold for production expenses has been updated to $6.25
i) Variable marketing & selling costs remain unchanged at 5% of sales
j) The estimate for variable packaging costs has been revised to $1.69
k) The annual change in variable expenses (COGS/unit and variable packaging) starting
in 2022 is to be moved to a more reasonable 2.5%
l) Note that Omni Consumer Products Inc. has decided to use a 15% discount rate
when assessing all new investments.

Questions
What is the Net Present Value and IRR for this project?
Should OCP move forward with the launch of the product?

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 MRK704 – Financial Aspects of Marketing
The Marketing Business Case II
Innovation Scenario

Bob is now looking at an investment to upgrade and relaunch the next generation of the
Dominator which he is “creatively” calling the Dominator Pro. The investment to
upgrade and relaunch the new product is $9.0 million. Bob and Richard have agreed
upon the following projections when upgrading the product to the “Pro” model:

a. The household penetration rate (the addressable market) in 2021 would increase
by 300 bps versus the base case due to the wider appeal of the Pro version.
b. The addressable market (penetration rate) would consistently grow by 60 bps per
annum starting in 2022.
c. No change to units purchased per household.
d. The Dominator Pro would achieve a 12% market share in 2021.
e. Market share in 2022 and beyond would, however, only grow by 50 bps per
annum
f. The selling price would now start at $18.99 in 2021 but would rise at 3.5% per
annum annually.
g. Cost of good sold in 2021 would now be $9.25 per unit.
h. Variable packaging costs would now be $2.10 per unit in 2021.
i. Fixed marketing costs would increase to $800,000 per year in 2021.
j. There is no change to the inflation rates or other assumptions for any of the line-
items not specifically mentioned above.

Questions
What is the Net Present Value and IRR for this project?
Should OCP move forward with the relaunch of the product?

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 MRK704 – Financial Aspects of Marketing
The Marketing Business Case II

PART 2 – Practice with Financial Functions

Attached separately you will find an Excel sheet titled “Feb 11 - Lab 4, Part 2 -
Financial functions”. Please fill in the highlighted cells with the relevant formula to
solve for the missing value denoted by a question mark.

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