Allegience Insurance Company's management is considering an advertising program that would require an initial expenditure of $185,360 and bring in additional sales over the next five years. The projected additional sales revenue in year 1 is $87,000, with associated expenses of $31,000. 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 $185,360 advertising cost is an expense.) Use Appendix A for your reference. Note: 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. Note: Round your intermediate calculations and final answer to the nearest whole dollar. 1. Payback period 2. Net present value years

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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EX 16-36 (Algo) Payback Period; Uneven Cash Flows (Section 3) (LO 16-1, 16-6, 16-8)
Allegience Insurance Company's management is considering an advertising program that would require an initial
expenditure of $185,360 and bring in additional sales over the next five years. The projected additional sales
revenue in year 1 is $87,000, with associated expenses of $31,000. 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 $185,360 advertising cost is an expense.)
Use Appendix A for your reference.
Note: 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.
Note: Round your intermediate calculations and final answer to the nearest whole dollar.
1. Payback period
2. Net present value
years
Transcribed Image Text:EX 16-36 (Algo) Payback Period; Uneven Cash Flows (Section 3) (LO 16-1, 16-6, 16-8) Allegience Insurance Company's management is considering an advertising program that would require an initial expenditure of $185,360 and bring in additional sales over the next five years. The projected additional sales revenue in year 1 is $87,000, with associated expenses of $31,000. 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 $185,360 advertising cost is an expense.) Use Appendix A for your reference. Note: 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. Note: Round your intermediate calculations and final answer to the nearest whole dollar. 1. Payback period 2. Net present value years
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