Net Present Value, IRR, and the Payback Period Infomercial Entertainment, Inc In the good of days-before cable TV fax machines, and multimedia personal computers-the phrase now a word from our sponsor..."usually meant just that, Television commercials were continued 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 Million by Investing in Real Estate That Nobody Wants." Since few people except for a few former savings and loan executives--managed to stay awake through these half-hour programs, the show attracted little interest. The era of the infomercial, those thirty-minute 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 l 9 percent of the popular vote, surely other advertisers could use the infomercial as a way to communicate their message to a sleepy, yet receptive, audienc 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, lnc.(IEI) was chartered to Corral local lat elevision time, and serve as a contract distribution agent for corporate clients eeking to air thing, minute infomercials throughout the United States. While IEI originally set out to be a distribution agent for late-night TV time, the firm soon realized that many medium-sized corporate advertisers 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 S200, 000, plus a S25,000 charge for installation and delivery of the equipment. This equipment would be depreciated according to the MACRS schedule for Six-year property shown in Table l IEI's managers believed they could mass-produce infomercial videos and offer them to corporate clients forS10 each. In 1993 the firm 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 firm pected sales to grow at a constant 5 percent annually over the next ten years, at which time the newly acquired video equipment would be worn-out, Finally, IEI would require an additional king capital totaling $10, 000 to support the initial sales increase promised by the investment in wor Infomercial project While IEI was interested in expanding its production operations, the firm also realized that acquisition of the video equipment would give it the added opportunity and capacity to produce Net Present Value, IRR, and the Payback Period Infomercial Entertainment, Inc In the good of days-before cable TV fax machines, and multimedia personal computers-the phrase now a word from our sponsor..."usually meant just that, Television commercials were continued 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 Million by Investing in Real Estate That Nobody Wants." Since few people except for a few former savings and loan executives--managed to stay awake through these half-hour programs, the show attracted little interest. The era of the infomercial, those thirty-minute 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 l 9 percent of the popular vote, surely other advertisers could use the infomercial as a way to communicate their message to a sleepy, yet receptive, audienc 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, lnc.(IEI) was chartered to Corral local lat elevision time, and serve as a contract distribution agent for corporate clients eeking to air thing, minute infomercials throughout the United States. While IEI originally set out to be a distribution agent for late-night TV time, the firm soon realized that many medium-sized corporate advertisers 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 S200, 000, plus a S25,000 charge for installation and delivery of the equipment. This equipment would be depreciated according to the MACRS schedule for Six-year property shown in Table l IEI's managers believed they could mass-produce infomercial videos and offer them to corporate clients forS10 each. In 1993 the firm 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 firm pected sales to grow at a constant 5 percent annually over the next ten years, at which time the newly acquired video equipment would be worn-out, Finally, IEI would require an additional king capital totaling $10, 000 to support the initial sales increase promised by the investment in wor Infomercial project While IEI was interested in expanding its production operations, the firm also realized that acquisition of the video equipment would give it the added opportunity and capacity to produce