FIN1101 CASE STUDY, MAJOR ASSIGNMENT

CASE STUDY: COMMODORE INTERNATIONAL


Commodore and Atari are excellent business case studies. You have a summary of Atari in Module One of your course content and the documentary ‘Once Upon Atari’ has been included in your course content. In fact, the host of the documentary (and programmer of Yar’s Revenge and E.T.) gave us permission to use the documentary at USQ. An overview of Commodore can be found here. Both companies had great innovations, good business models and excellent products that gave them a competitive advantage in the marketplace. Despite being among the most successful business enterprises of their day, both companies no longer exist. In fact, the end came relatively quickly for both of them. How they became successful and how they failed is worth knowing. I leave this to interested students to pursue.

The following scenario is based on the rise and decline of Commodore International. We use a mixture of real and hypothetical data to develop the scenarios.

It is the beginning of 1982. Commodore International has decided to launch its new product: a personal computer called the Commodore 64 (C64). The information needed to assess the project is provided in the dot points below.

• The C64 will initially sell at $595.
• Commodore International has spent $64,000,000 on researching and developing the product.
• Demand for the C64 is forecast for fourteen years as follows:
o For 1982 Commodore will sell 500,000 C64s.
o For 1983 to 1986, Commodore will sell 2,000,000 C64s each year but at a slightly reduced price (see next point).
o At the beginning of 1983, Commodore will reduce its selling price to $400 amidst fierce price competition between competitors.
o For 1987 to 1991 Commodore will sell 800,000 units per year (at $400 per unit).
o For 1992 to 1995 Commodore’s sales will fall by 15 percent each year (the selling price remains at $400 per unit). That is, sales for 1992 are 15 percent lower than in 1991. Sales for 1993 are 15 percent lower than for 1992 and so on…
o The project will be completed at the end of 1995.
• The C64 has an initial variable cost of $135 per unit. Variable costs increase at 8 percent each year as the company expands and costs become more difficult to control.
• The company will spend $10,000,000 each year on advertising the C64.
• Fixed costs are $60,000,000 for each year.
• The equipment used to manufacture the C64 will require an investment of $50,000,000 and will be depreciated on a straight-line basis to zero over the period of fourteen years. There will be no salvage value.
• Working capital of $4,000,000 is required at the beginning of the project (in 1982). Further injections of working capital are required as follows:
o $2,000,000 in 1986
o $3,500,000 in 1990
o $2,500,000 in 1993
• All working capital will be returned in the final year of the project.
• The taxation rate is 30 percent. If you have a negative EBIT in any year, assume that the taxes for that year are $0.00.
• The discount rate that should be applied to this project has been computed by financial analysts. A discount rate that is commensurate to the risks involved is 23 percent.

PREPARING YOUR ASSIGNMENT

The answer for this assignment must be submitted in a single Excel file.

PROBLEM ONE – SPREADSHEET CALCULATIONS (40 Marks)

Presentation of correct spreadsheet with calculations. Note* part marks can be allocated even if your spreadsheet is incorrect. Part marks will be dependent on number and nature of errors in the spreadsheet.

PROBLEM TWO (10 Marks)

Based on your spreadsheet, calculate the NPV of the C64 project using the discount rate of 23 percent and briefly advise whether the project should be undertaken and justify your answer (i.e. state simply in one sentence whether the project should be accepted and the reasons for your decision).

PROBLEM THREE (25 Marks)

Commodore International management are worried about the possibility of greater than expected competitive pressures in the labour market for the skilled technicians that they will employ on the C64 project. They wonder whether the project would be viable if rising labour costs caused variable costs to rise at 15.50 percent (rather than 8 percent). Adjust the variable costs for the C64 and rework problem one. Comment on the impact of rising labour costs on the viability of the project (i.e. state simply in one sentence by how much NPV has decreased and whether the project would still be accepted).

PROBLEM FOUR (25 Marks)

Pricing strategy is an important consideration for every firm. Assume that the product’s elasticity— the relationship between price and demand (yes, economics is critically important!)—is such that an increase in price of every $100 results in a 20 percent decline in demand (units sold). Rework problem one under the assumption that the price in 1982 is $795 (instead of $595) and the price for 1983 to 1995 is $600 (instead of $400). Briefly comment on the impact of this pricing strategy on the viability of the project (i.e. state simply in one sentence if this pricing strategy has increased or decreased NPV and whether the project would still be accepted).

MARKING CRITERIA

HD: To achieve a High Distinction (85% to 100%) students must demonstrate a very high level of competency in the content and skills assessed by this assignment. An assignment at this level will exhibit only very minor errors in both the numerical information and written conclusions. In assigning a grade to your assignment, the marker will focus on the accuracy and logic of your calculations and analysis. Errors will be very small rounding errors or very minor ‘transcription’ errors. If there are calculation errors, you cannot receive the highest grade.

A: To achieve a Distinction (75% to 85%) students must demonstrate a high level of competency in the content and skills assessed by this assignment. An assignment at this level will exhibit only minor errors in both the calculations and written expression. In assigning a grade to your assignment, the marker will focus on the accuracy and logic of your calculations and analysis. An assignment at this level will have only minor problems with the calculations and conclusions. Errors will be minor calculation errors rather than typographical or rounding errors.

B: To achieve a Credit (65% to 75%) students must demonstrate a sound-to-high level of competency in the content and skills assessed by this assignment. An assignment at this level will exhibit some errors and lapses in both the calculations and analytical conclusions and might be characterised by inelegance in approach and presentation. In assigning a grade to your assignment, the marker will focus on the accuracy and logic of your calculations and analysis. An assignment at this level will have some problems but these should be relatively easy to remedy by displaying more care and attention in the future.

C: To achieve a Pass (50% to 65%) students must demonstrate a sound level of competency in the content and skills assessed by this assignment. An assignment at this level will exhibit errors in both the calculations and analytical conclusions. However, the results are not completely wrong or misguided and could be improved with a more careful analysis of the problem. In assigning a grade to your assignment, the marker will focus on the accuracy and logic of your calculations and analysis. An assignment at this level will require the student to go back to the course material and work more carefully through the examples and problems.

F: To achieve a Fail (less than 50%) students must demonstrate a poor level of competency in the content and skills assessed by this assignment. An assignment at this level will exhibit substantial errors in both the calculations and analytical conclusions indicating that the student does not have a sound grasp of the problem and the relevant tools. In assigning a grade to your assignment, the marker will focus on the accuracy and logic of your calculations and analysis. An assignment at this level indicates that a substantial increase in the effort the student is applying to their studies is required.

Note on Part Marks

The marker will assign marks on the basis of the criteria. A poor assignment that is described by the ‘F’ criteria above will receive less than 50/100. However, you will not receive an F simply because your answer is wrong. If your answer is wrong because of a minor mistake, you might score very well even though you don’t have the completely correct answer. However, the HD grade is reserved for only the most minor variations from the correct solution. Anything in excess of this degree of variation will receive a lower grade.

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