Assignment:
|
|
|
*Expenses -% of Sales |
|
| Year |
Units Sold |
Selling price |
COGS |
Marketing |
Admin Expenses |
| 1 |
125 |
$80.00 |
70.00% |
24.00% |
$180.00 |
| 2 |
250 |
82 |
68.00% |
22.00% |
150 |
| 3 |
300 |
85 |
68.00% |
20.00% |
150 |
| 4 |
250 |
80 |
66.00% |
15.00% |
150 |
*All expenses exclude depreciation
Working Captial: $600 initially Year (0); $200 (year 1): full recovery
Initial investment: $4,800
Salavge value: $500 at the end of year 4
Tax rate: 39%
Cost of capital: 10%
Assume: (1) Straight-line depreciation to zero and (2) any taxable losses can be immediately used to offset taxable income somewhere else in the company.
Question 1: Contrauct the annual cash flows and calculate the NPV and PI for a project with the given information above.
Question 2: You hire a VP, who believe that by using a higher percentae of media advertising she can increase the number of units sold each year by 100. Recalculate the cash flows and NPV assuming this new campaign requires an additioanl $50 increase in administration expense and 2% (200 basis point) increase in marketing (or 26, 24, 22, and 17% in years 1 through 4, respectively) to cover the additional advertising in each of the four years to support the higher sales level. Is this a better alternative?
Question 3: You believe the tactic of the VP is riskier and should be discounted at a higher discount rate of 15%. Recalculate the revised projects NPV. Should you make the added investment?