Marcus\'s hair salon is considering buying airtime for a television commercial t
ID: 2761883 • Letter: M
Question
Marcus's hair salon is considering buying airtime for a television commercial to spread the word about their services and get clients during non-peak hours. Alternatively they could invest in a cheaper newspaper ad campaign. They forecasted the following cash flows for the two options:
Television: Investment of $6,500.00 would increase profits by $5,100.00 in the 1st year and $4,800.00 in the 2nd year.
Newspaper: Investment of $750.00 today would increase profits by $1,800.00 in the 1st year and $900.00 in the 2nd year.
The cost of capital is 13.00%.
a. Which of these investments is better?
Explanation / Answer
Alternative 1 : Present value of profit = (PVF@13%,1 *CF1)+(PVF@13%,2*CF2)
= (.88496* 5100) +(.78315 * 4800)
= 4513.30+ 3759.12
= 8272.42
NPV = 8272.42 - 6500 = 1772.42
Alternative 2 : Present value= (PVF@13%,1 *CF1)+(PVF@13%,2*CF2)
= (.88496* 1800) +(.78315 * 900)
= 1592.93+ 704.84
= 2297.76
NPV = 2297.76 - 750 = 1547.76
since NPV under option 1 is higher ,investment under option 1 is better.