16. As a marketing manager for one of the world's largest automakers, you are responsible for the advertising campaign for a new energy-efficient sports utility vehicle. Your support team has prepared the following table, which summarizes the (year-end) profitability, estimated number of vehicles sold, and average estimated selling price for alternative levels of advertising. The accounting department projects that the best alternative use for the funds used in the advertising campaign is an investment returning 9 percent. In light of the staggering cost of advertising (which accounts for the lower projected profits in years 1 and 2 for the high and moderate advertising intensities), the team leader recommends a low advertising intensity in order to maximize the value of the firm. Do you agree? Explain. (Hint: the value of the firm is directly related to the present value of future profits) Profitability by Advertising Intensity Profits (in millions) 1 Year 2 Year 3 Year Advertising Intensity High Moderate Low $20 40 75 $80 $300 80 135 110 118 Units Sold (in thousands) 1 Year 2 Year 3 Year 10 5 4 60 12.5 6 Average Selling Price 1 Year 2 Year 3 Year 120 $35,000 $36,500 $38,000 $35,800 $36,100 $36,300 25 7.2 $35,900 $36,250 $36,000
16. As a marketing manager for one of the world's largest automakers, you are responsible for the advertising campaign for a new energy-efficient sports utility vehicle. Your support team has prepared the following table, which summarizes the (year-end) profitability, estimated number of vehicles sold, and average estimated selling price for alternative levels of advertising. The accounting department projects that the best alternative use for the funds used in the advertising campaign is an investment returning 9 percent. In light of the staggering cost of advertising (which accounts for the lower projected profits in years 1 and 2 for the high and moderate advertising intensities), the team leader recommends a low advertising intensity in order to maximize the value of the firm. Do you agree? Explain. (Hint: the value of the firm is directly related to the present value of future profits) Profitability by Advertising Intensity Profits (in millions) 1 Year 2 Year 3 Year Advertising Intensity High Moderate Low $20 40 75 $80 $300 80 135 110 118 Units Sold (in thousands) 1 Year 2 Year 3 Year 10 5 4 60 12.5 6 Average Selling Price 1 Year 2 Year 3 Year 120 $35,000 $36,500 $38,000 $35,800 $36,100 $36,300 25 7.2 $35,900 $36,250 $36,000
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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Transcribed Image Text:16. As a marketing manager for one of the world's largest automakers, you are responsible for
the advertising campaign for a new energy-efficient sports utility vehicle. Your support team
has prepared the following table, which summarizes the (year-end) profitability, estimated
number of vehicles sold, and average estimated selling price for alternative levels of
advertising. The accounting department projects that the best alternative use for the funds used
in the advertising campaign is an investment returning 9 percent. In light of the staggering cost
of advertising (which accounts for the lower projected profits in years 1 and 2 for the high and
moderate advertising intensities), the team leader recommends a low advertising intensity in
order to maximize the value of the firm. Do you agree? Explain. (Hint: the value of the firm is
directly related to the present value of future profits)
Profitability by Advertising Intensity
Profits (in millions)
1 Year 2 Year 3 Year
Advertising Intensity
High
Moderate
Low
$20 $80 $300
40
80
135
75
110
118
Units Sold (in thousands)
1 Year 2 Year 3 Year
10
5
4
60
12.5
6
Average Selling Price
1 Year 2 Year
3 Year
120 $35,000 $36,500 $38,000
25 $35,800 $36,100 $36,300
7.2 $35,900 $36,250 $36,000
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