Allegience Insurance Company's management is considering an advertising program that would require an initial expenditure of $172,120 and bring in additional sales over the next five years. The projected additional sales revenue in year 1 is $79,000, with associated expenses of $27,000. 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 $172,120 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.) 1. Payback period 2. Net present value years
Allegience Insurance Company's management is considering an advertising program that would require an initial expenditure of $172,120 and bring in additional sales over the next five years. The projected additional sales revenue in year 1 is $79,000, with associated expenses of $27,000. 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 $172,120 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.) 1. Payback period 2. Net present value years
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:Allegience Insurance Company's management is considering an advertising program that would require
an initial expenditure of $172,120 and bring in additional sales over the next five years. The projected
additional sales revenue in year 1 is $79,000, with associated expenses of $27,000. 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 $172,120 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.)
1. Payback period
2. Net present value
years
Transcribed Image Text:Future Value and Present Value Tables
Table I
Future Value of $1.00(1+r)^
Period 4%
1
1
2
3
+ in
4
5
6
7
8
9
10
11
12
13
14
15
2
20
30
40
3
4
5
6
7
10
8
9
12
13
11
14
15
20
30
6
7
8
9
10
40
11
12
13
14
15
20
30
40
Period 4%
1
1.000
2
2.040
3
3.122
4
4.247
5
5.416
6
6.633
7
7.898
8
9.214
9
10.583
10
12.006
11
13.486
12 15.026
16.627
13
14 18.292
15 20.024
20
30
40
1.125
Table IV
1.040 1.060 1.080
1.082 1.124
1.170
1.217
1.265
1.316
1.369
1.423
1.480
Table III
Present Value of $1.00
1.540
Period 4% 6%
6%
1.601
1.665 2.133
1.732 2.261
1.801
1.263
1.254
1.405
1.361 1.464 1.574
1.338 1.469 1.611 1.762
1.419 1.587
1.504 1.714
1.594 1.851
1.166 1.210
1.191 1.260 1.331
2.191 3.207
1.898 2.332
2.012
Period 4%
1
2
3
4
5
8%
1.690 1.999 2.359
1.791 2.159
2.594
6%
1.000
2.060
3.184
4.375
5.637
6.975
8.394
9.898
11.491
13.181
10%
12%
1.100 1.120
14.972
16.870
1.772
1.949
2.144
1
(1 + r)"
2.518 3.139
2.853
2.720 3.452
2.937
2.397 3.172 4.177 5.474
3.798
6%
1.974
8%
10%
12%
1.000
1.000
1.000
2.080
2.100
2.120
3.246
3.310
3.374
4.506
4.641
4.779
5.867
6.105
6.353
7.336
7.716
8.115
8.923
9.487
10.089
10.637
11.436
12.300
12.488
13.580 14.776
14.487
15.938
17.549
16.646
18.531
20.655
18.977
21.385 24.133
18.882
21.495
24.523 28.029
24.215 27.976
32.393
21.015
23.276 27.152 31.773
37.280
36.778 45.762 57.276 75.052
29.778
56.085 79.058 113.283 164.496 241.330
95.026 154.762 259.057 442.597
2.211
2.476
Table II
Future Value of a Series of $1.00 Cash Flows (Ordinary Annuity)
8%
2.773
3.106
3.479
1
Present Value of Series of $1.00 Cash Flows
pº
3.896
.456 .312
.308 .174
.215 .149 .104
.099 .057 .033
.208 .097 .046 .022 .011
4.364
4.887
14%
1.140
1.300
1.482
1.689
1.925
2.195
2.502
2.853
4.661 6.728 9.646 13.743
3.252
3.707
4.226
4.818
5.492
6.261
7.138
3.243 5.744 10.063
4.801 10.286 21.725 45.260 93.051 188.880 1,469.800
.962 .943 .926 .909 .893 .877 .862 .847 .833
.925 .890 .857 .826 .797 .769 .743 .718 .694
.840 .794 .751 .712 .675 .641 .609 .579
.792 .735 .683 .636 .592 .552 .516 .482
.681 .621 .567 .519 .476 .437 .402
.889
.855
.822
.747
.650
.527 .429 .350 .287 .237 .195 .162 .135
.625 .497 .397 .319 .257 .208 .168
.137 .112
.601 .469 .368 .290 .229 .182 .145 .116 .093
.577 .442 .340 .263 .205 .160 .125 .099 .078
555 .417 315 .239 .183 .140 .108 .084 .065
20%
1.200
T
1.440
1.728
2.074
2.488
2.986
1
(1 + r)
3.583
4.300
17.450 29.960 50.950 237.380
5.160
6.192
7.430
8.916
10.699
12.839
8% 10% 12% 14% 16% 18% 20% 22% 24% 26%
15.407
38.338
(1 + r)" - 1
14%
20%
1.000
1.000
2.140
2.220
3.440
3.640
4.921
5.368
6.610
7.442
8.536
9.930
10.730
12.916
13.233
16.499
16.085
20.799
19.337
25.959
23.045
32.150
27.271
39.580
32.089
48.497
37.581
59.196
43.842
72.035
91.025
186.690
356.790 1,181.900
767.090 1.342.000 7.343.900
.085 .073 .062
.790 .705 .630 .564 .507 .456 .410 .370 .335 .303 .275 .250 .227 .207 .189
.760 .665 .583 .513 .452 .400 .354 .314 .279 .249 .222 .198 .178 .159 .143
.731 .627 540 .467 .404 .351 .305 .266 .233 .204 .179 .157 .139 .123 .108
.703 .592 .500 .424 .361 .308 .263 .225 .194 .167 .144 .125 .108 .094 .082
.676 .558 .463 .386 .322 .270 .227 .191 .162 .137 .116 .099
.112 .094 .079
.066 .056 .047
.092 .076 .062 .052 .043 .036
.075 .061 .050 .040 .033 .027
.049 .039 .032 .025 .021
.040 .031 .025 .020 .016
.062
.051
.073 .051 .037 .026 .019 .014 .010
.020 .012 .007 .004 .003 .002 .001
.005 .003 .001 .001
0.962 0.943 0.926
1.886 1.833
10% 12% 14%
16%
0.909 0.893 0.877 0.862 0.847
1.783
1.736 1.690 1.647 1.605 1.566
2.775 2.673 2.577 2.487 2.402 2.322 2.246 2.174
3.630 3.465 3.312 3.170 3.037 2.914 2.798 2.690
4.452 4.212 3.993 3.791 3.605 3.433 3.274 3.127
.820 .806 .794
.672 .650 .630
551 .524 .500 .477 455
.451 .423 .397 .373 .350
.370 .341 .315 .291 .269
28% 30% 32%
.781 .769 .758
.610 .592 .574
435
.329
.250
5.242 4.917
6.002 5.582 5.206
6.733 6.210 5.747 5.335 4.968 4.639 4.344 4.078
5.328 4.946 4.607 4.303
5.650 5.216 4.833 4.494
7.435 6.802 6.247 5.759
8.111 7.360 6.710 6.145
18% 20% 22% 24%
.007 .005
.001
25% 26% 28%
0.833 0.820 0.806 0.800 0.794 0.781 0.769
1.528 1.492 1.457 1.440 1.424 1.392 1.361
2.106 2.042 1.981 1.952 1.923 1.868
1.816
2.589 2.494 2.404 2.362 2.320 2.241 2.166
2.991 2.864 2.745 2.689 2.635 2.532 2.436
13.590 11.470 9.818 8.514 7.469 6.623 5.929 5.353 4.870 4.460
17.292 13.765 11.258 9.427 8.055 7.003 6.177 5.517 4.979 4.534
19.793 15.046 11.925 9.779 8.244 7.105 6.234 5.548 4.997 4.544
.004
4.623 4.355 4.111 3.889 3.685 3.498 3.326 3.167 3.020 2.951 2.885 2.759
2.643
4.868 4.564 4.288 4.039 3.812
3.605 3.416 3.242 3.161 3.083 2.937 2.802
3.837 3.619 3.421 3.329 3.241 3.076 2.925
4.031 3.786 3.566 3.463 3.366 3.184 3.019
4.192 3.923 3.682 3.571 3.465 3.269 3.092
30%
8.760 7.887 7.139 6.495
9.385 8.384 7.536 6.814 6.194 5.660
5.197 4.793
5.938 5.453 5.029 4.656 4.327 4.035 3.776 3.656 3.544 3.335 3.147
4.439 4.127 3.851 3.725 3.606 3.387 3.190
9.986 8.853 7.904 7.103 6.424 5.842 5.342 4.910 4.533 4.203 3.912 3.780 3.656 3.427 3.223
8.244 7.367 6.628 6.002 5.468 5.008 4.611 4.265 3.962 3.824 3.695 3.459 3.249
8.559 7.606 6.811 6.142 5.575 5.092 4.675 4.315 4.001 3.859 3.726
3.483 3.268
10.563 9.295
11.118 9.712
4.110 3.954 3.808 3.546 3.316
4.160 3.995 3.842 3.569 3.332
4.166 3.999 3.846 3.571 3.333
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