Ch7spreadsheets - Marginal Return on Investment Analysis In...

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Marginal Return on Investment Analysis In a recent study, 75% of CFOs always or almost always use NPV and IRR in their capital budgeting: Working out marginal return on investment in different marketing activities Required Rate of Return 20.0% Investment Forecast Incremental Cash Flow/Profit Year 0 1 2 3 4 5 NPV IRR Consumer Advertising (100,000) 100,000 20,000 10,000 - - $3,009 23% Trade Advertising (100,000) 80,000 40,000 20,000 10,000 - $10,841 28% Publicity campaign (100,000) 60,000 40,000 40,000 20,000 20,000 $18,609 30% Salesforce training (100,000) 50,000 60,000 50,000 40,000 40,000 $47,634 41% Sales promotions (100,000) 120,000 10,000 10,000 10,000 10,000 $21,573 39% Packaging redesign (100,000) - 60,000 60,000 50,000 50,000 $20,595 27% Product redesign (100,000) - 80,000 80,000 70,000 60,000 $59,722 40% Spreadsheet Instructions: Ask the management team to estimate the cash flow from an incremental spending of $100,000 on each of the above activities. Remove the two extreme estimates and average the rest to compute the incremental cash (contribution) in the matrix. The spreadsheet does the rest. Use the "Type a question for help" to learn the formula for calculating NPV and IRR. If you type in NPV and go to NPV worksheet function it presents the formula for NPV. Required rate of return (RRR) is what management require as a return on capital employed before taxes. The above spreadsheet can also be modified for other capital budgeting decisions. NPV stands for Net Present Value which is the sum of the present value of all cash flows (inflows and outflows) If the NPV is positive it should be undertaken because it is generating a rate of return even higher than the RRR. A negative NPV means that the rate of return is less than the RRR.
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This note was uploaded on 04/07/2008 for the course ENG 2021 taught by Professor Yunhaochen during the Spring '08 term at FIU.

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Ch7spreadsheets - Marginal Return on Investment Analysis In...

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