WISECAMS Inc. Scenario I

WISECAMS Inc. is an online retailer that sells only one product, a unique, multi- functional security camera. They are currently selling the 8th version of the camera and it is experiencing strong growth. It is May 4, 2013, and Colette Tatou, CEO of WISECAMS Inc., must decide if they should replace the existing model that they are selling (V8) to introduce the new and improved 9th version of the camera (V9). This new model incorporates revolutionary supersonic drone technology that their Chief Technology Officer, Remy Rata has developed.

The investment to bring the 9th version of the camera to market is substantial and requires a detailed financial assessment which is what Remy and Colette have asked you to do. If they proceed with the project to introduce the enhanced V9 camera, it will be launched on January 1, 2014, with all the upfront investment to launch the product occurring in 2013. Unless stated otherwise below, all financial information related to the camera is as of 2014 except the initial investment required to launch the product. Colette and Remy have decided that a 6-year time period (up to 2019) is appropriate for this analysis and WISECAMS Inc. uses a hurdle rate of 12.00% reflecting the high-risk nature of their business.

The V8 Camera (Base)

The V8 camera currently sells for $84.99 and WISECAMS Inc. has been able to increase the price of its camera, regardless of version, by $3.00 annually. While Colette expects to be able to do that for the next two years (2015 and 2016), past that point, she believes that due to the aging technology, they would only be able to take an increase of $1.00 per year. While WISECAMS Inc. would like to sell their customers multiple cameras, the product is designed in such a way that customers only need, and therefore, only buy 1 unit at a time. It is not necessary to show units per customer in your financial model.

Colette Tatou and Remy Rata decided early on that they would not be able to develop the appropriate manufacturing expertise to make their high-tech camera. Instead, they decided to use a contract manufacturer, Gusteaus Custom Creations, to manufacture the camera in a unique arrangement where WISECAMS Inc. provides the funding to build the manufacturing facility in which Gusteaus Custom Creations operates. Auguste Gusteau is in charge of Gusteaus Custom Creations and has told you that each V8 camera is sold to WISECAMS Inc. for $20.00. This cost is expected to increase at a rate of 2.75% per annum.

Fulfillment of their online orders has been subcontracted to Django Logistics. Django does all of the warehousing, picking, packing and shipping (logistics services) of the V8 cameras for WISECAMS Inc. WISECAMS Inc. treats this expense as a variable cost, not as part of the cost of goods. They currently work on a revenue-sharing model with Django Logistics which receives 3% of sales for all of the logistics services that they provide to WISECAMS Inc. Colette Tatou believes that when a new contract is signed with Django Logistics at the start of 2016, WISECAMS Inc. will be able to permanently lower the revenue share by 25 bps due to the increased volume since the original deal was signed back in 2011. There are several other miscellaneous variable costs involved in the business which Colette and Remy have forecasted at 1.50% of sales and is expected to remain constant.

Marketing is another major expense for WISECAMS Inc. As they are an online-only company, they have designed their marketing arrangements so that they vary with the number of clicks through to their website.

WISECAMS Inc. markets its camera exclusively through Google ads. WISECAMS gets 600,000 ad impressions (i.e. the number of times the ad is shown on a search result page) every week and the ad impressions are growing at 1.00% per annum. WISECAMS has achieved a 2.50% click-through rate (i.e. number of clicks that the ad receives as a percentage of the number of times the ad is shown) for its ads. As WISECAMS marketing team works on optimizing their online marketing programs, the click- through rate has been growing by 15 basis points (bps) every year and that rate of growth is expected to continue for the period of this analysis.

WISECAMS has been paying $5.00 as its cost per click (CPC) for its Google ads. Analyzing the trends, the cost per click is expected to increase by 5% every year into perpetuity.

Of those individuals that click through the ads and reach on WISECAMS website, 40% currently make a purchase (conversion rate). Unfortunately, the conversion rate has recently started to decline. Based on their experience with previous models, WISECAMS market research expert has forecasted that the conversation rate will decline by 75 bps in 2015 and 2016. In subsequent years, the change in the conversion rate will accelerate with a reduction of 150 bps, 175 bps and 200 bps for 2017, 2018 and 2019, respectively.

WISECAMS Inc. prides itself on being a technology and marketing company. They currently spend $9 million annually on executive salaries, office space, operating their information technology systems, customer service and research & development activities. These costs are forecasted to grow at a moderate 2.5% per annum.

V9 Camera (Scenario 1)

Remy Rata, WISECAMS CTO, really believes that the V9 Camera is an absolute game- changer, and it is proven out by the market research conducted by the industry expert, Anton Ego. As has been WISECAMS past practice, if they launch the V9 camera, the V8 camera would be immediately discontinued. This is a true replacement product.

Colette and Remy expect that WISECAMS will be able to sell the V9 for $99.99 when it is launched and that in subsequent years, they will be able to increase the price of the V9 by 4.50% per year until at least 2019. Note that you are required to calculate the year-over-year $ change in the selling price in the innovation case.

Auguste at Gusteaus Custom Creations has done a detailed costing analysis which has established a cost price of $33.00 per unit for the V9. He still expects that an inflation rate of 2.75% per year will still apply.

The technology involved in the V9 requires special packaging and special care during the shipping process. Colette and Remy expect that Django Logistics will want to renegotiate their revenue split and have projected that they will agree on a new contract with a rate of 4.25% of sales which will remain constant until at least the end of 2019. Other miscellaneous variable costs will continue to remain at 1.50% of sales.

No change is expected to the cost per click for the Google Ads ($5.00 per click plus the annual inflationary increase of 5.00%).

The number of ad impressions is expected to increase to 625,000 in 2014 and by a further 3% in 2015 due to the additional marketing push for the replacement of the V8 camera with the amazing V9 camera. After 2015, the change in ad impressions is forecasted to return to the normal growth rate of 1%.

In addition, the click-through rate in 2014 is expected to increase to 3.0% however that will be accompanied by a reduction in the conversion rate to 35%. In 2015, performance is expected to moderate once the initial excitement for the new product has subsided. The click-through rate in 2015 will fall by 50 basis points and then increase by 20 basis points in subsequent years (2016 and beyond). 2015s conversation rate is forecasted to bounce back to 40% and then decline by 75 basis points per annum from 2016 through 2019.

The V9 camera has some interactive features that require WISECAMS Inc. to increase its IT and customer service capabilities. This will increase their annual fixed costs spent on executive salaries, office space, operating their information technology systems, customer service and research & development activities by $3 million per year to $12 million with no change in the expected inflation rate (2.5%).

The initial investment to launch this product includes one-time marketing and public relations costs of $1.5 million, additional research and development of $2.0 million and

$2.0 million for modifications to Gusteaus Custom Creations production line that are paid for by WISECAMS Inc. There will also be another significant one-time investment of $382,000 required in 2016 for additional production capacity.

V9 Camera (Scenario 2)

Colette Tatou has also asked for another scenario to be analyzed with slightly different assumptions for the launch of the V9 camera. The modifications to create the second scenario that she requested are:

• WISECAMS Inc. is to spend an additional $0.6 million in fixed marketing costs for Version 9 in 2014 to increase the number of banner ad impressions achieved each year.
  • In 2015 and subsequent years, this additional fixed marketing investment is expected to increase by the same rate as WISECAMS Inc.s other fixed costs.
  • Hint: Yu dnt have t shw this additinal marketing expense separately frm the ther fixed csts.
• The impact of this additional marketing expenditure would be to increase the number of weekly impressions in 2014 to 750,000. In future years, the number of impressions is expected to grow at 2.25% per annum.
• There will also be an increase of $4.0 million in the upfront investment in marketing and public relations in 2013 to implement the initiative to support a pre-marketing program to create excitement before the product is officially launched in 2014.
• There are no other changes to the assumptions underlying the financial model and there are no changes to the projected results for the Version 9 model.

Questions:

1. What is your recommendation to Colette Tatou and Remy Rata on the introduction of the V9 camera (Scenario 1)? Your recommendation should be based solely on the financial projections, cumulative cash flow and the resulting NPV and IRR. (10 marks)
   • 2 marks each for getting the correct IRR, NPV and Payback for V9 Scenario 1
   • 4 marks for your recommendation and supporting rationale which should include references and comparisons to appropriate metrics

2. Based solely on the financial projections and the resulting NPV and IRR, and cumulative cash flow, would you recommend scenario 1 or 2 to Colette Tatou and Remy Rata? Provide a short rationale for your recommendation using and including your IRR, NPV and cumulative cash flow calculations for both scenarios along with any other metrics you believe to be relevant in justifying your recommendation. (10 marks)
   • 2 marks each for getting the correct IRR, NPV and Payback for V9 Scenario 2
   • 4 marks for your recommendation and supporting rationale which should include references and comparisons to appropriate metrics

* Answer should be in excel format*