Chapter 16, Problem 36E

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.)

Requited:

1. 1. Compute the payback period for the advertising program.
2. 2. Calculate the advertising program’s net present value, assuming an after-tax hurdle rate of 10 percent.