The case study presented a decision that needs to be made by Compass Records between owning and producing or licensed the recording rights for an up and coming Dublin folk music star, Adair Roscommon. Both scenarios offer different benefits and risks. Within the attached spreadsheet, each option has been analyzed based on their own specific cost structures over a span of year 0 – year 3, with equal sales figures.
To begin, I will speak about the results of the two cash flow analyses, which as stated earlier, are based on similar sales figures and life of investment. The cash flows that resulted from the “producing and owning” scenario were ($41,071) in year 0; $38,562 in year 1; $13,795 in year 2; and $6,388 in year 3. Therefore, NPV of this scenario is $8,903.50 and IRR is 29%. On the other hand, licensing the artist’s music would result in cash flows of ($26,371) in year 0; $36,045 in year 1; $9,790 in year 2; and $918 in year 3. Therefore, NPV of this scenario is $14,269.98 and IRR is 61%.
Based on these analyses alone, licensing Roscommon’s music is the most lucrative decision path to take. The NPV and IRR demonstrate that this path can produce double the return that the “producing and owning” road would earn. Beyond these benefits, the licensing also has a lower opportunity cost. At a year 0 cash out flow of ($26,371), the initial investment is almost half of the year 0 ($41,071) for producing and owning. Additionally, the licensing investment pays itself back in less than 1 year, while it would take the company approximately 1.2 years to pay itself back for producing and owning. Basically, the company would have less capital available for a longer period of time to invest in new potential performers if they chose to own and produce Roscommon’s work. On the other hand, as Brown states (as cited by Ross, Westerfield, & Jordan, 2010), “under the licensing contract, it’s very possible that another label could swoop in with cash and promises...
References: Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2010). Fundamentals of corporate finance (9th ed.). New York, New York: McGraw-Hill Irwin
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