Answer to Question #52125 in Microeconomics for Asif

Question

The ABC Computer Corporation is considering an increase in its annual advertising expenditures from $10 Million to $15 Million for a five year period. (i-e in years 1 to 5). The marketing department estimates that the increased advertising will increase profits by $4 Million in years 3 to 7 and by $3 Million in years 8 to 10, after which profits will return to the level they were at prior to the new program. If the firm use a discount rate of 10 percent, will the proposed advertising program increase shareholder's value?

Answer 1

If the ABC Computer Corporation is considering an increase in its annual advertising expenditures from $10 Million to $15 Million for a five
year period. (i-e in years 1 to 5) and the marketing department
estimates that the increased advertising will increase profits by $4
Million in years 3 to 7 and by $3 Million in years 8 to 10, after which
profits will return to the level they were at prior to the new program,
and a discount rate is 10 percent, then NPV = -5 + 4*(1/1.1^3 + 1/1.1^4 +
1/1.1^5 + 1/1.1^6 + 1/1.1^7) + 3*(1/1.1^8 + 1/1.1^9 + 1/1.1^10) =
$11.36 million.
So, the proposed advertising program will increase shareholder's value by $11.36 million.