Marvin and Chiquita (see previous case studies) had seen their business, Machiq Limited, change considerably over the years to a point where its brand name was recognised throughout the country. However, the two directors were very ambitious and believed that there was a worldwide market for the company’s products if only they could achieve global brand awareness. To this aim, they decided to investigate the cost of launching their own television channel (Machiq TV) to broadcast advertisements for Machiq Limited’s products 24 hours a day, seven days a week to the northern hemisphere.

Alternatively, they intended to consider a joint venture with Kaboosh Limited to launch a satellite (Matrix 1) that would enable the whole world to receive advertisements for both company’s products.

Available data is as follows:

Machiq TV:

Initial set-up costs: £250m Annual running costs: £100m Estimated life of project: 5 years Value of assets released at the end of the project: £40m Increased sales as a result of advertising products: £60m in the first year, growing cumulatively by 50% each year for the following four years.

Matrix 1 satellite:

Initial set-up costs: £700m Annual running costs: £50m Value of assets released at the end of the project: £10m

(Note: all the above to be shared 50/50 with Kaboosh Limited)

Estimated life of the project: 6 years Increased sales for Machiq Limited as a result of advertising products globally: £80m in the first year, growing cumulatively by 20% each year for the following five years.

Funding for both projects would be at a cost of capital of 6%.

Relevant discount factors at 6% p.a. are:

Year Discount factor 1 0.943 2 0.890 3 0.840 Case study Answers are in Appendix 3 Chapter 14 Inves tment apprais al 361 Year Discount factor 4 0.792 5 0.747 6 0.705 Required Using the net present value method of investment appraisal, critically evaluate the two proposals.