You are the Director of Marketing at a small company. You are considering launching a new advertising campaign. The ad campaign, an operating expense, will cost you $250,000 to launch today and then $50,000 per year for the next 3 years. The campaign will increase sales by $300,000 each year for the next six years (longer than campaign). After these six years, this advertising campaign will have minimal (consider it no effect) on future sales. Your Cost of Goods Sold are 68% of your sales which you expect will be the same for the additional sales. Your additional administrative expenses will be 3% of sales. Your additional level of working capital need will be 10% of yearly sales. Your tax rate is 40%. Your discount rate is 10%.
a. Should you go forward with the new advertising campaign? Why or Why Not? What is the NPV? What is the IRR?
b. If the increased sales only last for the length of the ad campaign (3 years), should you go forward with the new advertising campaign? Why or Why Not? What is the NPV? What is the IRR?
c. If the increased sales last even longer for a total of 8 years, should you go forward with the new advertising campaign? Why or Why Not? What is the NPV? What is the IRR?