Parkes Book Company’s management is considering an advertising program that would require an initial expenditure of $165 500 and bring in additional sales over the next five years. The projected additional sales revenue in year 1 is $75 000, with associated expenses of $25 000. The additional sales revenue and expenses from the advertising program are projected to increase by 10 percent each year. Ignore company income taxes.
1 Calculate the payback period for the advertising program.
2 Calculate the advertising program’s net present value, assuming a required rate of return of 8 percent.