Page 17 - SCS May 2018 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

keep some of the more premium content exclusive for fee paying members, or allow fee payers
earlier access to certain content. Only allowing the download option for fee paying members
could be a way to differentiate our normal service from the fee ad based service.

Conclusion
If we manage these risks well, and these initiatives are successful, the learnings we take could
lead to a multi-tiered membership structure in the future. With different price points for different
content/services it could allow us further opportunity to increase our membership base and
generate more returns to continue to invest in improving the content and services we offer.
Helping Couchweb to achieve its mission, which is “always entertaining”.

CHAPTER TEN

EXERCISE 1

Email

To: Chet Nolan, Chief Executive
From: Senior manager
Subject: Financial assessment of possible Russian venture.

Like any other capital investment the financial evaluation requires the comparison of the initial
investment to the returns to be generated in the future. It is generally accepted that the best way
to compare the capital outlay with the benefits is to use discounted cash flow techniques, as,
when done correctly, the resultant figure then represents the increase (or decrease) in the wealth
of the shareholders that the project should produce.

The cash flows

The first step in this process is to forecast the year-on-year additional cash inflows and outflows
that will arise from the proposal. It is important to realise that what needs to be forecast is not
simply the cash flows that the new proposal will produce, but the difference between the cash
flows with the new proposal and those that would be expected to arise if the business remained
as it is. Basically this means we would need to consider any possible effects of the new venture
on our existing business.

In this case we are looking at moving into a completely different geographical sector of the
market from our existing operations and, given the nature of our business, it seems unlikely that
there will be any impact on existing activities so this should not be a problem.

We would also need to consider the time scale over which the investment is to be assessed. It is
entirely possible that the income from Russia will continue for the foreseeable future, but
estimating year-on-year cash flows for a protracted period of time is not realistically practical. A
more practical approach is to estimate the cash flows on a year-by-year basis over a shorter
period of time and then make some simplifying assumption for the cash flows in subsequent
years.

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