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What about the widget or gadget ratio

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Reference no: EM132263361

Background

XYZ Company has two product lines: widgets and gadgets. Management is considering expanding their operations online through their site xyz to increase sales of their products with the ultimate goal of maximizing company profits. They are interested in evaluating the new market opportunity there and believe it will require a $10M investment today.
 
Data

Current population is 100M persons as of 2014 and is expected to grow 10% annually over the next 10 years.

Internet penetration was 50% as of 2014 and is expected to reach 80% in 10 years.

XYZ currently has a 5% market share of Internet visitors and expects this to reach 10% in 10 years.

XYZ makes money as visitors consume pageviews and buy products on the site.

Visitors generate 5 pageviews a year and $0.05 in revenue/pageview.

In addition, average conversion of users visiting the site who buy a product is 5% and is expected to remain constant.

Of products sold, management expects to sell widgets and gadgets in a ratio of 3:1.

Average selling price: Widget = $10 / Gadget = $15

Pricing is expected to remain flat due to competitive pressures.

Cost of revenues is expected to be 10% of total sales.

Operating expenses are expected to be 40% of total sales.

XYZ's tax rate is 30%.

The company's main operations are stable and low risk, equating to a cost of capital of 5%.
 
Questions to be Answered

Using the data above, would you recommend expanding operations online?

- Feel free to use any and all forms (spreadsheet and/or written response) to justify your answer.

Understanding that such a forecast model is only as good as the drivers behind it, XYZ would also like to know what main drivers impact the overall analysis and how they change the decision of whether to invest.

- For example, how much do varying expense margins impact the attractiveness of pursuing the opportunity?

- What about the widget / gadget ratio?

Use your judgment to surface the main drivers of the model and explain your rationale.

Attachment:- Excel Assignment-Case Study.rar

Reference no: EM132263361

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