Lassie Insurance Company’s management is considering an advertising program that would require an initial expenditure of P1,065,000 and bring in additional sales over the next five years. The cost of advertising is immediately recognized as expense. The projected additional sales revenue in Year 1 is P575,000, with associated expenses of P225,000. The additional sales revenue and expenses from the advertising program are projected to increase by 5% each year. Lassie Insurance Company’s tax rate is 20%. The advertising program has a slightly higher risk than the average risk of the company. The program’s index is 0.30 above the company’s risk index of 1.20. Risk-free rate is 4% and market risk premium is 7.5%.
1. Compute for the advertising program’s internal rate of return (IRR). Indicate your final answer in decimal form with 4 decimal places (e.g. 10.11% should be entered as 0.1011) A succeeding question is related to this question, kindly take note of your answer before proceeding to the next question.
2. Compute for the advertising program’s risk-adjusted discount rate (RADR). A succeeding question is related to this question, kindly take note of your answer before proceeding to the next question.
3. Compute for the advertising program’s net present value (NPV) using the project’s RADR. A succeeding question is related to this question, kindly take note of your answer before proceeding to the next question.
4. The program would be ____ based on its IRR and would be ____ if using NPV-RADR.