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We are assembling a top team across the company to look at the feasibility of adding a daily section of the newspaper and website devoted to national sports coverage. This would entail a significant expansion upon our current coverage with highlights of key games, sports scores, standings, etc. We have been asked to build a basic financial analysis to demonstrate what level of incremental revenue we have to assume to target acceptable levels of return.
Key assumptions for the business case:
- Assume the incremental revenue is all advertising related- This initiative should improve circulation retention and drive new subscriptions, but for the purpose of this analysis, assume no incremental impact here- Capital Investment of $2m for enhancements to existing website (assume 3 year useful life for book and tax basis accounting)- Incremental staffing costs of 12 heads at $100k per year- Incremental production costs of $0.02 per copy (assume 1.4 million daily copies and 304 annual pub days)- Assume advertising commissions expense at 5% of incremental revenue- Assume a corporate tax rate of 30%- Assume a discount rate of 10%
Please prepare a 3 year financial model that you will present to the management team. The analysis needs to demonstrate what level of incremental revenue is needed over a 3 year time horizon to meet our 10% hurdle rate. In addition, the analysis should touch on other key metrics such as NPV, IRR, and annual EBITDA impact.
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