Estimate the cash flows for the program

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Question - Kelce Advisors is implementing a new marketing program. Increased sales from the program are expected to last for the next four years and are estimated at $320,000 in year 1, $360,000 in year 2, $400,000 in year 3, and $440,000 in year 4. Kelce is deciding between two agencies to design the program. Firm Green charges $720,000 upfront for program design and will provide yearly advertising in its ongoing implementation. Firm Blue charges $560,000 for program design but Kelce will have to cover the yearly advertising cost of $40,000 on its own. Kelce's weighted average cost of capital is 9%. Assume all cash flow estimates are net of taxes.

a. Estimate the cash flows for the program if Kelce uses Firm Green and if Kelce uses Firm Blue and then calculate the following for both:

Payback period

Discounted payback period

Net present value

Internal rate of return

Profitability index

b. Should Kelce hire Firm Green or Firm Blue? Which capital budgeting method(s) calculated in part (a) did you use to make your decision?

Reference no: EM132747542

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