QMag Quantitative Analysis - Case Study Example

QMag Quantitative Analysis By: University City/State Date QMag Quantitative Analysis Introduction QMag is a favorite online magazine and has been in business for the last three years. However, for the three years, the magazine has been an online magazine covering a range of articles. The CEO of the QMag has an interest in producing a print edition of the journal. The primary objective is to increase the number of readers and come up with a strategy that will help the magazine to compete favorably with other journals. The main market targets are the supermarket shelves and news agencies. This report explores the viability of QMag expanding into print and the financial sustainability of the venture. The report starts by covering the NPV of QMag company. The findings clearly show that the projected returns from the investment will be higher than the cost of investment. The second section, the report explores the most appropriate loan option that the company will take to implement its finances. The third section has the details of the number of magazines that QMag will sell on the supermarket shelves to reach the break-even point. The last section explores the type and the number of adverts that QMag should use to generate revenue. The venture is therefore economically viable, and QMag will make profits from the venture. Finally, the report provides the recommendations for the QMag Company. NPV Discussion Points Needles, Powers, & Crosson (2010, p. 1238) defines NPV as the difference between present value of money inflows and money outflows. It helps to determine the profitability of a project in capital budgeting. This section analyses the NPV of the QMag to determine if it is worth it is financially viable to acquire an in-house printing line. Table 1: Cash Flows for QMag Year 0 1 2 3 4 5 6 7 8 Moneys Flow ($) -80,000 10,000 10,000 10,000 15,000 15,000 15,000 15,000 15,000 Cost of capital (%) 10% Net Present Value ($) $20,868.76 The NPV of the QMag is positive with a value of $20,868.76. Therefore, it will be economically viable to acquire an in-house printing line. Bank Loan Option Discussion Points The QMag requires the make a decision concerning the viable loan option to take. This section helps to determine the loan option that is best suited for the printing firm. First credit conditions: The first loan will have an interest rate of 6.75% per annum paid quarterly a year. Therefore, there will be 20 payments for the five years. The repayment amount per month will be $2,966.77, the total interest will be $9,327.97, and the total amount will be $59,327.97. Second loan conditions: For the second case, the interest rate will be 6.75% per annum paid twice a year for ten years. The total number of payments will also be 20. The amount of interest will increase to$19,663.81, while the amount that QMag will pay to the bank at the end of the ten years will be $69,663.81. Recommendations From the results obtained from the two loan options, I would recommend that QMag takes the first choice. The printing company will pay less amount of interest compared to the second choice. Break Even Discussion Points There is a need to boost the circulation of the printed version of QMag. This section explores two different outlets for sales, the 12 issue, and 24 issues subscriptions of QMag. Table 2: subscription options in QMag Subscription Options (months) % discount off Single issue price (%) Discounted price ($) (only point) Subscription Price ($) 12 magazine issue 30% $6.04 $72.48 24 magazine issue 40% $5.18 $124.32 For the 12 magazine issues, one copy will cost $6.04, and any customer will have to pay a total of $72.48. For the 24 magazine issues, one copy will cost $5.18, and the customer will have to pay $124.32. Therefore, the more the number of magazines sold by QMag, the higher the profit they, which means that QMag will make more profit by selling the 24 magazine issues. Therefore, QMag should heavily promote the 24 magazine issues. In the first option, QMag will pay a fixed rent of $3,960 must sell 2,800 copies to break-even. In the second choice, QMag has to pay 25% of the supermarket selling price for every 3,000 magazine copies stocked across the country, and QMag has to sell 3,400 magazine copies to break-even. The fixed cost in first is much lower than the fixed cost of the second option. The difference in the fixed price has resulted to a higher break-even quantity in the second choice. For the second choice, paying a 25% of the supermarket selling price of every 3,000 magazines stocked in the country increases the amount of the fixed cost. Three thousand publications will not be enough to make the sale in the supermarket viable. None of the two options will hit the $5,000 profit margin by selling three thousand copies. The best solution for QMag is option one because it will sell only 2,800 copies to compensate the costs incurred. Therefore, QMag has a possibility of making higher amounts of profit under this option. Maximising Advertising Revenue Discussion Points There are different costs of associated with the various types of advertisements. This section explores four methods of ads that QMag can use to generate income. The solution of linear equations shows that QMag should use seven double pages Ads, eight full-page Ads, one gift Ad, and five Look Ads. The firm will generate revenue of $60,000 from the 16 adverts. The total number of adverts used was 16, which was below the required number of the adverts. Therefore, it is possible to have a higher number of adverts until they reach the optimal number required. However, there exists an upper limit on the number of adverts, governed by the space consumed by the Ads. The revenue will increase by $1,000 while the number of adverts will increase to seventeen. The preparation time will also increase by 2.5 hours. The solution is still optimal after increasing the number of Gift of Ads by one because; the number of hours and adverts are still within the required range. Therefore, it will be worth to increase the number of Gifts by one. Conclusions and Recommendation After assessing the viability of the printing venture, it was clear that printing would be a sound investment for the company to take. It will help the company to reach many readers and improve its revenue. From the exploration, the NPV of the QMag was positive with a value of $20,868.76, which clearly showed that the income from the venture would surpass the costs incurred1. The company will also require a loan to boost its finances. The appropriate investment will have an interest rate of 6.75% per annum paid quarterly per year. The company needs to rent space in the supermarket for a fixed rent of $3,960 per month to make profits. However, it requires promoting the products and a subscription plan for 24 magazine issues. Finally, the use of the double page, full page, gift and look adverts will help the company to increase its revenue. Recommendations 1. QMag Company should take a loan of $50,000 with an interest rate of 6.75% and a payment period of five years. 2. QMag should heavily promote the 24 magazine issue subscriptions. 3. QMag should use seven double pages Ads, eight full-page Ads, two gift Ad, and five Look Ads Net Present Value Discussion Points NPV formula computes the significance of a venture and uses a reduction rate and a sequence of upcoming payment (outflows) in addition to the revenue (inflows). In the Microsoft Excel, the syntax for the NPV is as follows: =NPV (proportion, Value1, [value2] …) Rate refers to proportion of price cut over the interval of a single period. Value1, Value2… Value1 is compulsory while the other values are discretionary and may range from 1 to 254 arguments and they represent the payments and incomes. The arguments must be correspondingly spread out in period and must also transpire at the end. NPV stock starts a period afore the time of the cost1 cash flow and finishes with the last money flow. EXCEL set-up: Appendix 2 Bank Loan Option Discussion Points (a) First bank loan option. Monthly repayment for the loan is: With A as the amount borrowed, n is the tenure of the loan, and i represents monthly interest rate divided by the loan repayments periods. For our case (b) Second Loan Option (c) Amount of Interest and the Total Amount To get the sum of the interest from the Microsoft Excel, for the first loan option, we use the formulae =SUM (D8: D28). The total interest for this case was ($9,327.97). The total amount paid for this case is the sum of the amount borrowed and the total interest. To get the sum of the interest from the Microsoft Excel, for the first loan option, we use the formulae =SUM (K8: K28). The total interest for this case was ($19,663.81) The total amount paid for this case is the sum of the amount borrowed and the total interest. Appendix 3 -Break Even Discussion Points (a) The variable cost includes the postage cost $2.45, plastic sleeve packaging and labels 45 cents, magazine consumables worth $1.23. The total cost will be. Other expenses include printing run cost of and writer’s salary per magazine issue. Finally, there must be a profit of per magazine issue. Therefore, the cost of producing a magazine issue will be: This value represents the fixed cost. Adding the profit per magazine issue, we get, . However, there are 7000 subscribers. Therefore, distributing this cost among all the anticipated subscribers, we get: The total cost of a magazine will be We allow the number of issues to be and the total price to be P. The linear programming model for the total cost of a given number of issues will be: The price for all the twelve issues will be: (b) The price for a single issue is discounted price at 70%. Therefore, the full price will be: The company allows a 40% off of the full price of QMag. This value represents the price for a subscriber to one magazine. The price for all 24 issues will be: (c) Fixed cost in (a) is $1,200 and $6,540. The total value of the fixed cost for the first option will be: The variable costs will be Contribution margin per unit Break-even volume will be: The result shows that if the company sells 2,734 magazines, it will make a profit of $1.52. Therefore, QMag must sell more than 2,734 magazines to make considerable profits. For the second option, the company has to pay the 25% for 3,000 magazines. For this case, we use Cost of 3,000 magazines will be: Therefore, total fixed cost is: The result shows that if the company sells 3,000 magazines using the second option, it will make a loss of. However, the breakpoint number will be: (d) The cost function for break-even analysis is: Option 1 – 2,800 copies Option 2 – 3,400 copies Appendix 4 - Maximising Advertising Revenue Discussion Points Double-Page Ad Full-Page Ad Gift Ad Get The Look Ad Decision Variables Objective and Objective Function Maximise Constraints Number of adverts Preparation time Maximum number of adverts Constraints for the decision variables (a) (b) QMag should use seven double pages Ad, eight full-page Ad, one gift Ad, and five Look Ads. The maximum revenue from the adverts will be $60,000, and the highest number of adverts will be 16. The time to prepare the Ads will be 27.5 hours. (c) (d) The revenue will increase by $1,000 while the number of adverts will increase to seventeen. The preparation time will also increase by 2.5 hours. The solution is still optimal after increasing the number of Gift of Ads by one because; the number of hours and adverts are still within the required range. References Read More