Find the NPV of the advertising promotion project

Naylor Coulthard is considering investing in a major advertising promotion of one of its skincare products. The advertising campaign would cost €250 000, all of which is assumed to be spent at Time 0. The effectiveness of the advertising would be short-lived; it would produce incremental cash inflows only in years 1 and 2. The year 1 net cash inflow is estimated at €196 000. The net cash inflow for year 2 is estimated at €168 000. After the end of year 2 another major advertising campaign would probably be needed to produce further incremental revenues. The company’s cost of capital is 9%.

What is the NPV of the advertising promotion project?

Does the NPV suggest that the project should be accepted or rejected?

Assuming a constant discount rate of 14%, the present value of €85 000 receivable at the

end of year 4 is (to the nearest €):

a) €50 320

b) €47 600

c) €49 045

d) €73 100.

Solution: