Resource 5 (Brand Equity)

Question 1
VROP Inc. is considering acquiring a brand (Brand AB) for $300,000. The management
has requested your assistance is gauging the feasibility of this move. The following
information was supplied:

$ The estimated sales (units):-

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

Sales (units) est. 75,000 80,000 90,000 100,000 120,000

$ Price per unit: $15

Unit cost: $10
$ Projected development costs are $1,000,000
$ Cost of capital: 15%
$ The Present Value Interest Factors (PVIF) based on a 15% cost of capital:

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

PVIF (15%) 0.870 0.756 0.658 0.572 0.497

$ Additional cost information:-

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

Marketing ($) 40,000 60,000 80,000 85,000 90,000

Depreciation 12,000 12,000 14,600 14,600 15,700

Overheads ($) 50,000 55,000 60,000 75,000 80,000

Other 2,500 3,000 3,500 4,000 4,500

$ The company capital charge: 10%

$ Role of Branding Index: 79%
$ After year 5 earnings are expected to experience constant growth of 7%
$ The relevant tax rate is 34%

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

Capital employed 80,000 85,700 90,600 100,000 105,000

Calculate brand equity for Brand AB and hence advise VROP Inc.