Question

A management company is planning to spend $650,000 on a new marketing campaign. They believe that this action will result in additional cash flows of $346,000 each year for three years. If the discount rate is 17.5 percent, what is the NPV on this project? (Enter negative amounts using negative sign e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525.)

Answer 1

The management company's new marketing campaign with a cash flow of $346,000 each year for three years and a discount rate of 17.5 percent has a calculated NPV of $108,195. This is found by first calculating the present value of each year's cash flow and then summing these to subtract the initial investment.

Step-by-step explanation:

The management company is considering a new marketing campaign and wants to calculate the Net Present Value (NPV) of the investment given a cash flow of $346,000 each year for three years and a discount rate of 17.5 percent. To determine the NPV, the present value of each cash flow must be calculated and summed. The calculation for each year's cash flow (CF) is CF / (1 + discount rate)^year. Doing that for each of the three years:

• Year 1: $346,000 / (1 + 0.175)^1
• Year 2: $346,000 / (1 + 0.175)^2
• Year 3: $346,000 / (1 + 0.175)^3

After calculating the present value for each year, these are added together to find the total present value of the cash flows. The initial investment is then subtracted from this total to find the NPV. The specific calculations and the final NPV would be:

• Year 1 PV = $294,468
• Year 2 PV = $250,521
• Year 3 PV = $213,206
• Total PV = $758,195
• NPV = Total PV - Initial Investment = $758,195 - $650,000 = $108,195

Therefore, the NPV of the marketing campaign project, using a discount rate of 17.5 percent, is $108,195. Remember, positive NPV indicates that the projected earnings, discounted for its time value, exceed the initial investment.