Question

Question 1:

Ford is going to purchase a Superbowl ad for $5M. They expect to generate 98M views. Their research shows that they convert 1 out of every 100,000 customer views per month for 6 months into customers. The average profit per customer is $950.

What is the return on their investment?

What is the payback period? If Ford requires their money back in 3 months, do they make this investment?

Assume a 2% discount rate. What is the NPV?

Question 2:

The Los Angeles Rams want to build a new stadium. They expect the stadium will last 25 years. They are deciding if they should put a roof on the building. The roof will cost $175M. They will finance the roof using debt that will cost them 6%. Part of the roof cost includes solar panels that are expected to save the Rams from paying their electricity bill. The cost of electricity is $1M in year 1 and expected to grow by 3% per year. In addition, the more pleasant climate the roof will provide is expected to increase ticket value and the ability to have other events. The Rams expect incremental profits to be $8.5M in year one and they expect it to grow by 4%.

Should the Rams add the roof?

The Rams may have been aggressive. Incremental profit will still be $8.5M but will only grow by 3%. Should they still add the roof?

The Rams realize the solar panels will still be very valuable in 25 years and will be able to resell them for $60M. Should they add the roof?

EXCEL SOLUTION

Answer 1

Answer 1:-

Return on Investment = (revenues / initial investment) x 100

Pay back period = Initial investment / cash inflows

Below is the Formula sheet of above excel sheet:-

Answer 2:-

Decision rule - If the NPV is negative, project or investment should not be made

Part 1-

Below is the Formula sheets of above excel sheets:-

Since, NPV is negative Rams should not add the roof.

Part 2 -

Below is the Formula sheets of above excel sheets:-

Since, NPV is negative Rams should not add the roof.

Part 3 -

Below is the Formula sheets of above excel sheets:-

Since, NPV is negative Rams should not add the roof.