Question

A manager is deciding between two marketing campaigns: Campaign A will generate net returns of $120,000...

A manager is deciding between two marketing campaigns:

  • Campaign A will generate net returns of $120,000 one year from now and $45,000 three years from now.
  • Campaign B will generate net returns of $45,000 two years from now and $120,000 five years from now.

The required rate of return is 6.00%.

a. What is the Discounted Cash Flow (DCF) of Campaign A?

b. What is the Discounted Cash Flow (DCF) of Campaign B?

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Answer #1

Campaign A

Rate of Return (r) is 6.00%

Cash Flow1 (CF1) = $120000

CashFlow2 (CF2) = CashFlow3 (CF3)= CashFlow4 (CF4) = $45000

Discounted Cash Flow (DCF) = CF1/(1+r) + CF2/(1+r)^2 + CF3/(1+r)^3 + CF4/(1+r)^4

= 120000/(1+0.06) + 45000/(1+0.06)^2+ 45000/(1+0.06)^3+ 45000/(1+0.06)^4

= $226684.47

Campaign B

Rate of Return (r) is 6.00%

Cash Flow1 (CF1) = $45000

CashFlow2 (CF2) = CashFlow3 (CF3)= CashFlow4 (CF4) = $120000

Discounted Cash Flow (DCF) = CF1/(1+r) + CF2/(1+r)^2 + CF3/(1+r)^3 + CF4/(1+r)^4

= 45000/(1+0.06) + 120000/(1+0.06)^2+ 120000/(1+0.06)^3+ 120000/(1+0.06)^4

= $345057.96

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