Question

Allegience Insurance Company's management is considering an advertising program that would require an initial expenditure of $165,500 and bring in additional sales over the next five years. The projected additional sales revenue in year 1 is $75,000, with associated expenses of $25,000. 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 $165,500 advertising cost is an expense.) 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.

To Tutor
In this question above I want to know that when I      calculate net cash outflow, Should I less taxes from advertising expense?

Thank you

Answer 1

a]		0	1	2	3	4	5
	After tax initial expenditure = 165500*(1-40%) =	$           99,300
	Additional sales revenue		$              75,000	$           82,500	$          90,750	$         99,825	$      1,09,808
	Additional expenditure		$              25,000	$           27,500	$          30,250	$         33,275	$         36,603
	Incremental NOI		$              50,000	$           55,000	$          60,500	$         66,550	$         73,205
	Tax at 40%		$              20,000	$           22,000	$          24,200	$         26,620	$         29,282
	Incremental NOPAT [OCF}		$              30,000	$           33,000	$          36,300	$         39,930	$         43,923
	After tax cash flows	$          -99,300	$              30,000	$           33,000	$          36,300	$         39,930	$         43,923
	Cumulative after tax cash flows	$          -99,300	$            -69,300	$         -36,300	$                    -	$         39,930	$         83,853
	Payback period	3 Years
b]	PVIF at 10%	1	0.90909	0.82645	0.75131	0.68301	0.62092
	PV of cash flows at 10%	$          -99,300	$              27,273	$           27,273	$          27,273	$         27,273	$         27,273
	NPV	$           37,064