Question
Please help me calculate the payback period and profitability index for the following project. This is all the info provided. Can you advise me how
Please help me calculate the payback period and profitability index for the following project. This is all the info provided. Can you advise me how to explain your calculations in an essay?
You work as a finance manager for Drill Tech, Inc., a mid-sizedmanufacturing company located in Minnesota. Three capital project requests were identified aspotential projects for the company to pursue in the upcoming fiscal year. In the meeting to discuss capital projects, the director of finance (and your boss), Jennifer Davidson, gives you a synopsis of the projects along with thisquestion: Which one of these projects will provide the most shareholder value to the company?
She also tells you that other than what is noted in each project scenario, all other costs will remain constant, and you should remember to only evaluate the incremental changes to cash flows.
- A major new marketing/advertising campaign, which will cost $2 million per year and last 6 years.
- It is forecast that the campaign will increase sales/revenues and costs of sales by 15% per year.
- Annual sales for the previous year were $20 million.
- The marginal corporate tax rate is presumed to be 25%.
- Being a moderate risk investment, the required rate of return of the project is 10%.
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