Compass Records
Case #19
Compass Records
Synopsis and Objectives
The cofounders of Compass Records, a small, independent music recording company, must decide whether to produce and own the next album of an up-and-coming folk musician, or simply license her finished recording. The case presents information sufficient to build cash flow forecasts for either investment alternative. The task for the students is to build a valuation model for the two capital investment alternatives, whereby they can evaluate the attractiveness of the investment based on net present value (NPV) and the internal rate of return (IRR) of the discounted cash flows (DCF). Further, the student will have the opportunity to interpret those results and to test those measures’ sensitivity to variability in the base case.
This case was prepared with the following objectives in mind.
• Apply DCF analysis to an either/or capital investment decision.
• Interpret the NPV and IRR results.
• Exercise a sensitivity analysis to determine the factors that have the most effect on an investment’s potential outcome.
Suggested Questions
1. Please assess the economic benefits of owning and producing an album versus licensing an artist’s recording. What are the initial outlays under either scenario? What are the benefits over time? Do the NPV and IRR results suggest that one scenario is superior to the other?
2. What uncertainties or qualitative considerations might influence your recommendation? How do variations in the forecasted sales affect the decision? Please estimate the impact on NPV from a change in your estimate of future sales for Adair Roscommon’s album.
3. What should Alison Brown do? Prepare a recommendation as to whether Compass Records should license Adair Roscommon’s next recording, or produce and own it. WACC calculation:
You can assume a tax rate of 35%. Make assumptions for the following components and justify them:
a. Kd : You may want to check the annual reports. If you can’t
Compass Records
Synopsis and Objectives
The cofounders of Compass Records, a small, independent music recording company, must decide whether to produce and own the next album of an up-and-coming folk musician, or simply license her finished recording. The case presents information sufficient to build cash flow forecasts for either investment alternative. The task for the students is to build a valuation model for the two capital investment alternatives, whereby they can evaluate the attractiveness of the investment based on net present value (NPV) and the internal rate of return (IRR) of the discounted cash flows (DCF). Further, the student will have the opportunity to interpret those results and to test those measures’ sensitivity to variability in the base case.
This case was prepared with the following objectives in mind.
• Apply DCF analysis to an either/or capital investment decision.
• Interpret the NPV and IRR results.
• Exercise a sensitivity analysis to determine the factors that have the most effect on an investment’s potential outcome.
Suggested Questions
1. Please assess the economic benefits of owning and producing an album versus licensing an artist’s recording. What are the initial outlays under either scenario? What are the benefits over time? Do the NPV and IRR results suggest that one scenario is superior to the other?
2. What uncertainties or qualitative considerations might influence your recommendation? How do variations in the forecasted sales affect the decision? Please estimate the impact on NPV from a change in your estimate of future sales for Adair Roscommon’s album.
3. What should Alison Brown do? Prepare a recommendation as to whether Compass Records should license Adair Roscommon’s next recording, or produce and own it. WACC calculation:
You can assume a tax rate of 35%. Make assumptions for the following components and justify them:
a. Kd : You may want to check the annual reports. If you can’t