A company is currently earning $1; 000 in proÃt per month. It could run a $500 advertising campaign today that is expected to increase future profits, starting next period, by $100. Suppose the companyÃs alternative investment opportunities are such that future income should be discounted by 5% per month. How much is the company currently worth, and how would the advertising campaign a§ect its value? Solution: The advertising campaign would reduce 0 from $1; 000 to $500, but increase 1 (and all future monthly profits) to $1; 100. The discount factor is 0:95, so the value of the company is 0 = 0 + 1 1 = 500 + 0:95 10:95 (1; 100) = 21; 400 with the advertising campaign, compared to 0 = 0+ 1 1 = 1; 000+ 0:95 10:95 (1; 000) = 20; 000 without it. The advertising campaign would increase the value of the company by $1; 400.
A company is currently earning $1; 000 in proÃt per month. It could run a $500 advertising campaign today that is expected to increase future profits, starting next period, by $100. Suppose the companyÃs alternative investment opportunities are such that future income should be discounted by 5% per month. How much is the company currently worth, and how would the advertising campaign a§ect its value? Solution: The advertising campaign would reduce 0 from $1; 000 to $500, but increase 1 (and all future monthly profits) to $1; 100. The discount factor is 0:95, so the value of the company is 0 = 0 + 1 1 = 500 + 0:95 10:95 (1; 100) = 21; 400 with the advertising campaign, compared to 0 = 0+ 1 1 = 1; 000+ 0:95 10:95 (1; 000) = 20; 000 without it. The advertising campaign would increase the value of the company by $1; 400.
Related questions
NTN Company's market for the Model 55 has changed significantly, and NTN has had to drop the price per unit from $265 to $125. There are some units in the work in process inventory that have costs of $150 per unit associated with them. NTN could sell these units in their current state for $100 each. It will cost NTN $10 per unit to complete these units so that they can be sold for $125 each.
| 3. | A new employee looks at the analysis and exclaims, âWe'll lose money with either of these alternatives! Let's just throw these units in the trash!â Suppose the alternative to trashing is choosing the more profitable of the two alternatives (that the new employee looked at and did not like). What effect will the trashing option (that the new employee wants) have on net income? | |
| A) | Net income will increase by $35 per unit for each unit discarded. | |
| B) | Net income will decrease by $115 per unit for each unit discarded. | |
| C) | It will have no effect on net income. | |
| D) | Net income will decrease by $100 per unit for each unit discarded. | |
| 4. | When the incremental revenues and expenses are analyzed, the company is better off by | |
| A) | $15 per unit if they complete the units. | |
| B) | $25 per unit if they sell the units in their current state. | |
| C) | $10 per unit if they sell the units in their current state. | |
| D) | $125 per unit if they complete the units. | |
Use the following information to answer questions 7-8:
The EconoPrice Hotel has 200 rooms. Each room rents at $110 per night and variable costs total $27 per room per night of occupancy. Fixed costs total $76,000 per month.
| 7. | If the hotel spends an additional $20,000 in the month of February on advertising they feel that they can expect occupancy rate to increase by 10%. What would be the financial impact of spending this additional money on advertising for the month of February (28 days)? | |
| A) | Total fixed costs will increase by $10,500. | |
| B) | Net income will increase by $16,320. | |
| C) | Net income will increase by $26,480. | |
| D) | Total fixed costs will remain the same. | |
| 8. | If 75% of the rooms are occupied each night in the month of February (28 days) what will total costs be for the month? | |
| A) | $189,400 | |
| B) | $173,600. | |
| C) | $197,400 | |
| D) | $155,680. | |
Use the following information to answer questions 7-8:
The EconoPrice Hotel has 200 rooms. Each room rents at $110 per night and variable costs total $27 per room per night of occupancy. Fixed costs total $76,000 per month.
| 7. | If the hotel spends an additional $20,000 in the month of February on advertising they feel that they can expect occupancy rate to increase by 10%. What would be the financial impact of spending this additional money on advertising for the month of February (28 days)? | |
| A) | Total fixed costs will increase by $10,500. | |
| B) | Net income will increase by $16,320. | |
| C) | Net income will increase by $26,480. | |
| D) | Total fixed costs will remain the same. | |
| 8. | If 75% of the rooms are occupied each night in the month of February (28 days) what will total costs be for the month? | |
| A) | $189,400 | |
| B) | $173,600. | |
| C) | $197,400 | |
| D) | $155,680. | |
Use the following information to answer questions 7-8:
The EconoPrice Hotel has 200 rooms. Each room rents at $110 per night and variable costs total $27 per room per night of occupancy. Fixed costs total $76,000 per month.
| 7. | If the hotel spends an additional $20,000 in the month of February on advertising they feel that they can expect occupancy rate to increase by 10%. What would be the financial impact of spending this additional money on advertising for the month of February (28 days)? | |
| A) | Total fixed costs will increase by $10,500. | |
| B) | Net income will increase by $16,320. | |
| C) | Net income will increase by $26,480. | |
| D) | Total fixed costs will remain the same. | |
| 8. | If 75% of the rooms are occupied each night in the month of February (28 days) what will total costs be for the month? | |||||||||||||||||||||||||||||||
| A) | $189,400 | |||||||||||||||||||||||||||||||
| B) | $173,600. | |||||||||||||||||||||||||||||||
| C) | $197,400 | |||||||||||||||||||||||||||||||
| D) | $155,680. Use the following information to answer questions 7-8: The EconoPrice Hotel has 200 rooms. Each room rents at $110 per night and variable costs total $27 per room per night of occupancy. Fixed costs total $76,000 per month.
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