Finance Assignment | Professional Writing

You are in charge of Marketing and Advertising for a large gaming company. You have been asked to determine the best return for a campaign and you have two options to evaluate as outlined below. The Company’s WACC is 6%. The Company has set its own internal hurdle rate at 14%. Calculate the NPV, IRR, MIRR and payback period for each option. Which option would you choose? If the Company’s internal hurdle rate is 14%, which projects will be approved?

Option 1: Direct mailing. The Company will perform a direct mailing campaign to with catalogs mailed to 50,000 households. Based upon past experience, the Company can obtain 8% as clients. The average gross client revenue in year 1 is $112 which will increase $20 each year after year 1. In year 2, only 60% of the first year clients will be a repeat client. In year 3, 50% of year 2 clients will remain a client and in year 4, 50% of 3rd year clients will be retained. Costs per client is $54 and is anticipated to increase 2% each year subsequent to year 1. The mailing will cost a total of $10.50 per household.

Option 2: Television. The Company will perform a television campaign over a period of 4 months. Each month, their commercials will run multiple times for a cost of $250,000 per month. Based upon historical data, the advertising will reach 85,000 households each month (eg each month has a new set of households). Of those households 5% will become customers. The average gross client revenue in year 1 is $112 which will increase $20 each year after year 1. In year 2, only 60% of the first year clients will be a repeat client. In year 3, 50% of year 2 clients will remain a client and in year 4, 50% of 3rd year clients will be retained. Costs per client is $54 and is anticipated to increase 2% each year subsequent to year 1.

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