Question
Allegience Insurance Companys management is considering an advertising program that would require an initial expenditure of $196,945 and bring in additional sales over the next
Allegience Insurance Companys management is considering an advertising program that would require an initial expenditure of $196,945 and bring in additional sales over the next five years. The projected additional sales revenue in year 1 is $94,000, with associated expenses of $34,500. The additional sales revenue and expenses from the advertising program are projected to increase by 10 percent each year. Allegiences tax rate is 30 percent. (Hint: The $196,945 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 programs net present value, assuming an after-tax hurdle rate of 10 percent.
(Round your intermediate calculations and final answer to the nearest whole dollar.)
Jack and Jills Place is a nonprofit nursery school run by the parents of the enrolled children. Since the school is out of town, it has a well rather than a city water supply. Lately, the well has become unreliable, and the school has had to bring in bottled drinking water. The schools governing board is considering drilling a new well (at the top of the hill, naturally). The board estimates that a new well would cost $2,458 and save the school $400 annually for 10 years. The schools hurdle rate is 9 percent. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: Compute the internal rate of return on the new well. Should the governing board approve the new well?
Apendix:
\begin{tabular}{|l|l|l|} \hline & & \\ \hline Internal rate of return & Yes & % \\ \hline Approve? & Yes & \\ \hline \end{tabular} Table II Future Value of a Series of $1.00 Cash Flows (Orchnary Annulty) r(1+r)n1 Table III Table IV Present Value or Series of $1.00 Cash Fiows r1(1(1+rn)1)
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