Infomercial Entertainment, Inc. In the good ol' daysbefore cable TV, fax machines, and multimedia personal computersthe phrase, "... and now a word from our sponsor ..." usually meant just that. Television commercials were conned to thirty and sixty-second messages, grouped together to occupy only two or three minutes of viewing time. Occasionally, if you stayed up late enough sitting in front of the tube, you'd see thirty-minute segments on riveting topics like "How to Turn $10 Into $10 Milieu by Investing in Real Estate That Nobody Wants." Since few peopleexcept for a few former savings and loan executivesmmanaged to stay awake through these halfohour programs, the shows attracted little interest. The era of the infomercial, those thirtyminute paid video advertisements devoted to selling a particular idea or product, didn't really begin until after the 1992 presidential campaign. Following Ross Perot's unsuccessful bid for public office, however, things started looking up for this new marketing venue. If Perot could use the half-hour segments on late- night TV to capture 19 percent of the popular vote, surely other advertisers could use the infomercial as a way to communicate their message to a sleepy, yet receptive, audience. Indeed, in the wake of the election, many Fortune-500 corporations selling consumer products were eager to take the plunge and go head-to-head with Letterman on late-night TV. Unfortunately, obtaining exclusive airtime and marketing rights in multiple television markets on the same night was a distribution nightmare. Traditional advertising agencies that purchased large blocks of television time bought it during prime viewing hours. In contrast, late-night time was sold by individual stations to local advertisers on a spot basis. Consequently, nationwide distribution of corporate infomercials could be almost impossible. Fortunately, the free enterprise system specializes in impossible situations. In late 1992, sensing a new business opportunity, Infomercial Entertainment, inc. (IE1) was chartered to corral local late-night television time, and serve as a contract distribution agent for corporate clients seeking to air thirty-minute infomercials throughout the United States. While [BI originally set out to be a distribution agent for late-night TV time, the rm soon realized that many mediumeizcd corporate adveitisers lacked the production and duplication equipment necessary to produce multiple copies of their infomercial messages. Sensing a new opportunity to expand their business, IEI's management team sought to provide video production and duplication services for their customers. Through the careful purchase of used video equipment from a bankrupt motion picture studio in 1993, IEI could acquire the necessary electronics and video hardware for $200,000, plus a $25,000 charge for installation and delivery of the equipment. This equipment would be depreciated according to the MACRS schedule for live-year property shown in Table l. IEl's managers believed they could mass-produce infomercial videos and o'er them to corporate clients for $10 each. In 1993 the rm forecast total volume of 5,000 infomercial videos, and estimated the materials cost of production at 50 percent of the net sales price. Labor and overhead expenses would amount to an additional 12 percent of the unit selling price. The rm expected sales to grow at a constant 5 percent annually over the next ten years, at which time the newly acquired video equipment would be won't-out. Finally, IEI would require an additional investment in working capital totaling $10,000 to support the initial sales increase promised by the Infomercial project. While IEI Was interested in expanding its production operations, the rm also realized that acquisition of the video equipment would give it the added opportunity and capacity to produce corporate treating videos for commercial clients. IEI's managers believed they could produce 875 different training lms in 1993, and that clients would order, on average, ve copies of each lm. The rm believed that demand for its training videos would grow at 7 percent annually over the next 10 years. Each training video would carry a net price of $8 per copy, production and materials costs would total 43 percent of this selling price, and overhead expenses would average 10 percent of the unit selling price. IEI would require an additional $5,000 investment in working capital to support the Training Video project. After a ten-year service life, EEI could sell its video equipment for a nominal $20,000. The farm's alter-tax weighted average cost of capital is ill percent, and the video production projectsm-including both infomercials and training lms-ware considered to be only slightly more risky than the rm's current business ventures. lEl's marginal tax rate is 35 percent, and the lm's nancial statement forecast shows that production costs and overhead expenses will maintain a constant relationship with sales over the next 10 years. TABLE 1 MACRS Recovezy Allowance Percentages: Five-Year Proer immense