Times are tough for Auger Biotech. Having raised $85 million in an initial publi

Question

Times are tough for Auger Biotech. Having raised $85 million in an initial public offering of its stock early in the year, the company is poised to launch its product. If Auger engages in a promotional comapign costing $60 million this year, its annual after-tax cash flow over the next five years will be only $700,000. If it does not undertake the campaign, it expects its after-tax cash flow to be minus $18 million annually for the same period. Assuming the company has decided to stay in its chosen business, is this campign worthwhile when the discount rate is 10 percent? Why or why not?

Explanation / Answer

The campaign is worthwhile because the net present value of it is -57,346K, and if nothing is done its net preent value of cash flows will be -68,234K. (Computed using a TI BAII plus financial calculator).

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