Allegience Insurance Company’s management is considering an advertising program that would require an initial expenditure of $16

Question

3 years ago

8

Allegience Insurance Company’s management is considering an advertising program that would require an initial expenditure of $16

5,500 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 30 percent. (Hint: The $165,500 advertising cost is an expense.)
Required:

Compute the payback period for the advertising program.

Calculate the advertising program’s net present value, assuming an after-tax hurdle rate of 10 percent.

Business