Question

What are the variety of capital budgeting tools including net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI). Only evaluate the incremental changes to cash flows and use applicable metrics that align with the values below.

Use an Excel spreadsheet showing the required cash flow forecasts and capital budgeting tool calculations.

Marketing/Advertising Campaign

• A major new marketing/advertising campaign, which will cost $2 million per year and last 6 years.
• It is forecast that the campaign will increase sales/revenues and costs of sales by 15% per year.
• Annual sales for the previous year were $20 million.
• The marginal corporate tax rate is presumed to be 25%.
• Being a moderate risk investment, the required rate of return of the project is 10%.
• Cost of sales costs of sales by 15% per year.

Answer 1

Year	Cost of Campaign ($ mn)	Revenue	Cost	Tax (Revenue-Cost of Sales-Cost of Campaign)*25%	Cash Flow (Revenue-Cost of Sales-Cost of Campaign-Tax)	Present Value of Cash Flow (CashFlow/1.1^year)
1	2.00	23.00	3.45	4.39	13.16	11.97
2	2.00	26.45	3.97	5.12	15.36	12.70
3	2.00	30.42	4.56	5.96	17.89	13.44
4	2.00	34.98	5.25	6.93	20.80	14.21
5	2.00	40.23	6.03	8.05	24.14	14.99
6	2.00	46.26	6.94	9.33	27.99	15.80
					NPV (Total of Present Values)	83.10

As there is no initial investment at year 0, so can't determine the IRR, payback period and PI in this case.