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    Construct the annual cash flows and calculate the NPV and PI

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    11.21

    *Expenses -% of Sales
    Year Units Sold Selling price COGS Marketing Admin Expenses
    1 125 $80.00 70.00% 24.00% $180.00
    2 250 82 68.00% 22.00% 150
    3 300 85 68.00% 20.00% 150
    4 250 80 66.00% 15.00% 150

    *all expenses exclude depreciation

    Working Captial: $600 initially Year (0); $200 (year 1): full recovery
    Initial investment: $4,800
    Salavge value: $500 at the end of year 4
    Tax rate: 39%
    Cost of capital: 10%

    Assume: (1) Straight-line depreciation to zero and (2) any taxable losses can be immediately used to
    offset taxable income somewhere else in the company.

    A) Contrauct the annual cash flows and calculate the NPV and PI for a project with the given
    information above.

    B) You hire a VP, who believe that by using a higher percentae of media advertising she can increase
    the number of units sold each year by 100. Recalculate the cash flows and NPV assuming this new campaign
    requires an additioanl $50 increase in administration expense and 2% (200 basis point) increase
    in marketing (or 26, 24, 22, and 17% in years 1 through 4, respectively) to cover the additional
    advertising in each of the four years to support the higher sales level. Is this a better alternative?

    C) You believe the tactic of the VP is riskier and should be discounted at a higher discount rate
    of 15%. Recalculate the revised projects NPV. Should you make the added investment?

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    The expert constructs the annual cash flows and calculates the NPV and PI.

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