Reference no: EM132814559

Context Case: Amazon's Advertising Decision: Amazon is reviewing whether it should buy exclusive rights to advertise on the front page of a social networking search engine, Zignet. At the launch of the agreement, Amazon is expected to make an upfront payment of $15 million to Zignet. In addition, Amazon would spend an average of $15,000 per day on Zignet advertising for a full year. In return, Amazon's brand would be featured exclusively and prominently on many of Zignet's pages for one year. More specifically, Amazon expects to be present on 60% of Zignet's page views per day. Based on industry estimates, Amazon believes that 0.25% of every page view at Zignet would result in a visit to its own website for the entire year of this deal. Amazon's own experience suggests that about 1% of the visitors to its site actually buy books and other merchandise. While the typical retention rate for Amazon customers is over 90%, management is concerned that customers coming from Zignet site will have a retention rate of only 70%. The dollar amount of a typical order is $100. Amazon's CFO was concerned that with a 30% gross margin per order and 10% cost of capital, this deal may not be worthwhile.

Requirement: To Prepare the base case spreadsheet model and answer the what-if questions for the following:

a. What is the net value of the deal if Amazon is present on 80% of Zignet's page views per day? Assume Zignet's page views to be 50 million in a day.

b. How does the net value of the deal vary if the upfront payment is varied from $5 million to $15 million (in steps of 1 million)? Use a one-way data table.

c. How does the net value vary when Zignet's page views are varied from 30 million to 80 million per day (in steps of 10 million) and the retention rate is varied from 50% to 90% (in steps of 5%)? Use a two-way data table.