Sky Bsb

Topics: Capital expenditure, Cost, Capital Pages: 2 (633 words) Published: April 22, 2006
Payoff Matrix:

Since the players have only 2 options – "compete" and "exit", calculate the NPV of the project for the players under given scenarios: Taking the given assumptions into consideration and year 1990 as Year ‘0' (as the losses and costs incurred through 1990 are considered sunk): If BSB competes and Sky TV exists = NPV (BSB) = -104.09

(I.e. (179.97)/1.10+ (139.86)/1.21+(71.25)/1.33)+ (30.99)/1.46+9.8/1.61+ (13.25)/1.77+ (169.14)/1.95+ 44.97/21.14+74.08/2.36+74.08/2.60/0.10)

If Sky TV competes and BSB exists= NPV (Sky TV) = 660.702
(I.e. (61.88)/1.10+ (34.39)/1.21+ (18.27)/1.33)+ 18.90/1.46+ 56.06/1.61+ 50.75/1.77+ 79.86/1.95+ 108.97/2.14+ 138.08/2.36+138.08/2.60/0.10)

If both Sky TV and BSB compete: Starting '93, both the companies will have equal market shares (Assumption given in case). In the given cash flow model; both companies starting '96 are already assumed to be having equal market share. So making a difference in the assumptions for their market share for years '93, '94 and '95 will not make a huge difference in the above-calculated NPV's. In such a scenario, NPV (BSB) will still be negative and NPV (Sky TV) will still be positive. The main reason behind the negative NPV for BSB is its huge capital expenditures and not market share.

CompeteExit
Compete(30, 70)
(L, G)
(100, 0)
(L, 0)
Exit(0,100)
(0,G)(0,0)
Sky TV BSB

(L = Loss (negative NPV), G = Gain (positive NPV), 0 = No loss no gain). Also based on percentage of market shares. As can be seen from the payoff matrix, the satellite broadcasting business is a losing proposition for the BSB. It is not possible for the market to sustain these two capital-intensive satellite operation companies in competition. BSB's shoulders the burden of building and launching its own satellites, more ambitious and expensive technology and higher capital...
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