Can someone please assist me with the following problem. Please show all work so
ID: 2808624 • Letter: C
Question
Can someone please assist me with the following problem. Please show all work so I can understand the concept. Thank you!
CHAPTER6 Capital Budgeting: Valuing Business Cash Flows 219 18. (Cash-flow analysis) The Aphrodite Company is a manufacturer of per- fume. The company is about to launch a new line of products. The marketing department has to decide whether to use an aggressive or regular campaign Aggressive campaign Regular campaign lnicial cost (production of commercial advertisement Initial cost (using a less famous using a top model): $400,000 First month profit: $20,000 Monthly growth in profit (month 2-12): 10% model): $150,000 First month profit: $10,000 Monthly growth in profits (month 2-12): 6% 2 months the company is going to launch a new Monthly profit (month 13): S20,000 of products and it is expected that the monthly profts from the current line would be $20,000 forever. The annual cost of capital is 7%. Calculate the NPV of each campaign, and decide which campaign the company should undertake.Explanation / Answer
Discounting Factor 0.583333 (7/12) FV of Perpetuity = Cashflow/discounting factor Aggressive Campaign Therefore Cashflow at 13th month = 20000/0.0058333 = 3428591 Month 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Cash Flow -$4,00,000 $20,000 $22,000 $24,200 $26,620 $29,282 $32,210 $35,431 $38,974 $42,872 $47,159 $51,875 $57,062 $34,28,591 Discounting Factor 1 0.994201 0.988435 0.982702 0.977003 0.971337 0.965704 0.960103 0.954535 0.948999 0.943496 0.938024 0.932584 0.9271753 Cash Flow -$4,00,000 $19,884 $21,746 $23,781 $26,008 $28,443 $31,106 $34,018 $37,202 $40,685 $44,494 $48,660 $53,215 $31,78,905 NPV= $31,88,147 Regular Campaign Month 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Cash Flow -$1,50,000 $10,000 $10,600 $11,660 $12,826 $14,109 $15,519 $17,071 $18,779 $20,656 $22,722 $24,994 $27,494 $34,28,591 Discounting Factor 1 0.994201 0.988435 0.982702 0.977003 0.971337 0.965704 0.960103 0.954535 0.948999 0.943496 0.938024 0.932584 0.9271753 Cash Flow -$1,50,000 $9,942 $10,477 $11,458 $12,531 $13,704 $14,987 $16,390 $17,925 $19,603 $21,438 $23,445 $25,640 $31,78,905 NPV= $32,26,447 NPV from Regular Campaign is higher and as a result the company should undertake regular campaign