Compass Records Valuation and Analysis

Compass Records Valuation and Analysis

Adair Roscommon in 2004 have released her album in which she got success by getting very popular among her fans. And also, she became the winner of the radio station. Compass records decided to invest in Roscommon as they find it a lucrative option investing there. He signed the contract and after analysing various qualitative and quantitative factors as discussed below and  assuming that he has capital to invest in any option, purchase and own option is better.

Thus, there are two options available: compass records should offer $20,000 of the next recording and also should have a choice and right to production of 3 more albums. This option will lead to the reduction in royalty amount which have to be paid to Roscommon but there will be inclusion of some other conditions as well.

The second option is that there should be a performance-based contract in which there will be a bonus of $3000. The performance will be then determined by the unit sales. If this option will be pursued by compass records then, they have the right to produce album.

By considering the assumptions we can see that the result of NPV and IRR are more in purchase and own option. The assumption made is that Compass records have capital to invest for either of the options so if we consider the DCF analysis using the Base Case units sold per Geographic regions or using percentage of sale options.

The two options almost have same costs of pricing, marketing and on the assets including inventory including the average.  In the first year, $3,980 in the second year, $2,745 in the third year and $2,295 in the last year of assumptions

But it’s had different in recoupable (while Recoupable of Produce and Own option is $26,000, Recoupable of License just $9,500). These two these options have IRR higher than Discount Rate (Discount Rate is 12%, IRR of produce and own is 32.3%, IRR of license is 66.6%), means all of two option are positive for invest in. Based on two assumptions about DCF analysis, it can be seen that all of two options: product and own option and license option have positive results in investment. 

But still invest=ting in purchase and own is preferable and to be adopted by the company as its NPV is higher and it will give long term profitability.  It means that the   Compass Records can investment in purchase and own option but still they can still can get their profit, and get their return on money but license and own option have shorter time of payback period which is more than one year but less than two years and the production option have payback of more than two years.  Thus, License option will be more lucrative and have the good opportunity in investment than production and own option thereby reducing the payback period, it can help them in reinvestment in another project. The reason is that because of IRR, NPV of license option is greater than IRR and also the NPV of produce and own option is also higher which determined the profit of the project. So, on the basis of financial aspect purchase and own will be preferred as payback period does not matter much in front of profits in the long run.  This implies that if Compass Record can sell 10,000units, License option can be a better for investment in short-term because as it will assist the Compass Record in achieving the profit of $16,030 which is higher than produce and own option having the value of $10,695. The problem with this that it cannot increase the profit in long-term say 3 year or more.

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