Question

10. You are in charge of Marketing and Advertising for a large gaming company. You have been asked to determine the best return for a campaign and you have two oni evaluate as outlined below. The Company S VACC IS 6%. The Company has set it own internal hurdle rate at 14%. Calculate the NPV, IRR, MIRR and nav each option. Which option would you choose? If the Company's internal hurdle roto ir 14%, which projects will be approved? Option 1: Direct mailing. The Company will perform a direct mailing campaign to with catalogs mailed to 50,000 households. Based upon past experience, the Company can obtain 8% as clients. The average gross client revenue in year 1 is $112 which will increase $20 each year after year 1. In year 2, only 60% of the first year clients will be a repeat client. In year 3, 50% of year 2 clients will remain a client and in year 4, 50% of 3rd year clients will be retained. Costs per client is $54 and is anticipated to increase 2% each year subsequent to year 1. The mailing will cost a total of $10.50 per household. Option 2: Television. The Company will perform a television campaign over a period of 4 months. Each month, their commercials will run multiple times for a cost of $250,000 per month. Based upon historical data, the advertising will reach 85,000 households each month (eg each month has a new set of households). Of those households 5% will become customers. The average gross client revenue in year 1 is $112 which will increase $20 each year after year 1. In year 2, only 60% of the first year clients will be a repeat client. In year 3, 50% of year 2 clients will remain a client and in year 4, 50% of 3rd year clients will be retained. Costs per client is $54 and is anticipated to increase 2% each year subsequent to year 1.

Answer 1

A B . Direct mailing campaign per cl. revanue total revanue 6 Year clients 0 00 4000 2400 1200 600 112 132 132 448000 316800 158400 79200 per cl. exp exp. net rev. 10.5 525000 -525000 54 216000 232000 55.08 132192 184608 56.1816 67417.9 90982.1 57.305232 34383.1 44816.9 10 11 12 132 IRR MIRR NPV 0.027217418 0.044551908 ($91,495.87) 13 14 15 16 17 18 19 20

A с E F G 5 Television campaign per cl. revanue total revanue 6 Year clients Per I. exp per cl. exp exp. 7 0 8 4250 2550 1275 637.5 9 112 132 132 132 476000 336600 168300 84150 54 55.08 56.1816 57.305232 net rev. -1000000 229500 246500 140454 196146 71631.5 96668.46 36532.1 47617.915 10 11 12 13 14 IRR MIRR NPV -0.23065588 -0.09728203 ($539,401.87) 15

Calculation of Pay back period

Option 1:-

= 4 + (525000-507590.1)/44816.9

=4.39 Years

Option 2 :-

Payment has not been got back.

Final decision

any of the advertisement campaign should not be choose.