In: Accounting
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 30 percent.
(Hint: The $165,500 advertising cost is an expense.)
Use Appendix A for your reference. (Use appropriate
factor(s) from the tables provided.)
Required:
1. Compute the payback period for the advertising
program.
2. Calculate the advertising program’s net present
value, assuming an after-tax hurdle rate of 10 percent.
(Round your intermediate calculations and final answer to
the nearest whole dollar.)