economics question "A company is considering entering into a new marketing campaign. If it engages in...

economics question

"A company is considering entering into a new marketing campaign. If it engages in this marketing campaign, it must pay $9,000 immediately and $7,000 each at the end of year 1 and year 2. The company believes its annual revenues due to the marketing campaign will be $11,000 at the end of year 1, $9,000 at the end of year 2, and $6,000 at the end of year 3. What is the annual equivalent worth of this marketing campaign over the next three years? The interest rate is 4.2% compounded annually."

Expert Solution



Equivalent annual worth = Equivalent annual benefit - Equivalent annual cost

Equivalent annual benefit = Present value of future benefits / 3 = $24149.04 / 3 = $8,049.68
Year	Benefit	Discount factor @ 4.2%	Present Value
0	$0.00	1	$0.00
1	$11,000.00	0.959693	$10,556.62
2	$9,000.00	0.92101	$8,289.09
3	$6,000.00	0.883887	$5,303.32
Present value of future benefits			$24,149.04

Equivalent annual cost = Present value of future costs / 3 years = $22164.92 / 3 = $7,388.31
Year	Costs	Discount factor @ 4.2%	Present Value
0	$9,000.00	1	$9,000.00
1	$7,000.00	0.959693	$6,717.85
2	$7,000.00	0.92101	$6,447.07
3	$0.00	0.883887	$0.00
Present value of future costs			$22,164.92

Equivalent annual worth = Equivalent annual benefit - Equivalent annual cost = $8,049.68 - $7,388.31 = $661.37

jeff jeffy answered 2 years ago

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