Question

Allegience Insurance Company's management is considering an advertising program that would require an initial expenditure of $177,085 and bring in additional sales over the next five years. The projected additional sales revenue in year 1 is $82,000, with associated expenses of $28,500. The additional sales revenue and expenses from the advertising program are projected to increase by 10 percent each year. Allegience's tax rate is 40 percent. (Hint: The $177,085 advertising cost is an expense.) Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1. Compute the payback period for the advertising program. 2. Calculate the advertising program's net present value, assuming an after-tax hurdle rate of 10 percent. (Round your intermediate and final answers to the nearest whole dollar.) I years 1. Payback period 2. Net present value

Answer 1

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Solution: Discount table is not given, can be with 5 decimal or 3 decimal places: Answer are highlighted in yellow: Cash flow Cummulative 53500 53500 58850 112350 64735 177085 71209 248294 78329 326623 1) Payback period is 3 years Cash flow Discount factor @ 10% Year Ol -177085 1 -177085 66051 or 66096 Year 1 53500 0.909 48632 Year 2 58850 0.826 48610 Year 3 64735 0.751 48616 Year 4 Year 5 7120978329 0.683 0.621 48635 48643 NPV (Total) 0.90909 48636 0.82645 0.75131 4863748636 0.68301 48636 0.62092 48636