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Case Study 1 Amcott

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RONA MAE R. RODRIGUEZ
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151 views1 page

Case Study 1 Amcott

Uploaded by

RONA MAE R. RODRIGUEZ
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Rona Mae R.

Rodriguez BSA-I
ECON2N 2:30-3:30 PM

Case Study #1- AMCOTT LOSES $3.5 MILLION MANAGER FIRED

On Tuesday software giant Amount posted a year-end operation loss of $3.5 million.
Reportedly, $1.7 million loss stemmed from its foreign language division.

With short-term interest rates at 7 percent, Amcott decided to use $20 million of its retained
earnings to purchase three-year rights to Magicword, a software package that converts
generic word processor files saved as French text into English. First-year sales revenue from
the software was $7 million, but thereafter sales were halted pending a copyright
infringement suit filed by Foreign, Inc. Amcott lost the suit and paid damages of $1.7 million.
Industry insiders say that the copyright violation pertained to “a very small component of
Magicword".

Ralph, the Amcott manager who was fired over the incident, was quoted as saying, “I'm a
scapegoat for the attorneys (at Amcott) who didn't do their home-work before buying the
rights to Magicword. I projected annual sales of $7 million per year for three years. My sales
forecasts were right on target.”

Do you know why Ralph was fired?

Ralph was not fired because of the mistakes of his legal department but for his managerial
incompetence, he didn't process and verified the information given to him. If he would have
projected the Net Present Value of purchasing Magicword, he would have expected Amcott
to lose $1,629,788 after 3 years.

NPV= 7,000,000/(1+.07)^1 + 7,000,000/(1+.07)^2 + 7,000,000/(1+.07)^3 – 20,000,000

= - 1,629,788

As a manager, you should often take advice from other departments so Ralph may have
taken advice from the legal department that there would be no legal ramifications from
purchasing Magicword. The attorneys of Amcott did not fully examine all potential threats on
purchasing the software. However, even with the poor guidance, Ralph should have that this
deal would produce negative NPV, based on projected sales $7 million per year.

In order to produce a positive NPV ,the company would need to generate about $7,621,034
in sales per year.

NPV= ( 7,621,034/(1+.07)^1) + (7,621,034/(1+.07)^2) + (7,621,034/(1+.07)^3)-20,000,000


NPV=1.80

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