Case Compass Records

Case Compass Records

A compass record is a small Recording label owned and run by Alison Brown and it is located in Nashville Tennessee. Because of its size and resource limitations the company promotes new comer artists with considerable low level of sales if compared with those belonging to major big size labels. The company divides its contract between licensing contracts, the majority, and produce-own contracts. It depends on the financial returns and other benefits involving the artist and her o his potential. Lately, Alison has been analyzing the situation involving Adair Roscommon, an Irish singer with a lot of talent and great potential to generate sales. Alison is trying to decide which of the types of contracts she should arrange with Roscommon. The financial analysis will determine if whether producing or licensing Roscommon's work is the most profitable and financially attractive option.

Assumptions

Licensing may have the same benefit of producing additional albums with the performance-based deal. This way by licensing, the benefits would be greater because no necessity of high up-front investments as well as maintaining the expected returns of following albums under the same negotiation. In addition, the licensing contract would benefit of lower level of recoupable because of the low production in contrast to owning contract. As a result, the recouped costs would be realized in a shorter period of time than it would under the producing contract that was subject of not realization of recoupable cost within the expected cash flow period accumulating eventual losses related to recoupable costs.

Analysis

As result of my analysis, I have discovered that financially wise both contracts are viable and returns are considerably good. If Alison decided to sign a contract with Roscommon where Compass records would be responsible for producing the album, despite the high initial investment the project would be profitable based on the net present value and internal rate of return. The NPV for this project was around $8, 721, 47 and IRR was around 29% which is higher than de discount rate of 12% this way satisfying its main rule. On the other hand, the licensing project was also interesting based on the same measures. The NPV of this project was about $ 14 155, 99 and the IRR was around 60%. The main difference between both projects was basically the costs involved in the production, the recoupable cost involved in each project, and the future benefits of both contracts. Under the licensing contract, Ms Brown would have little up-front investment of about $ 9 500, 00 divided in; advance of $ 3000, 00; Initial Promotion expenses of $ 6000, 00; and $ 500, 00 related to additional costs of updating the album's packaging. All these costs were recouped and were expected to be recouped right in the first year.