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Qn Sleep on will use the existing advertising campaigns for its
hotels to also advertise the theme park. This will save approximately $2 million per year in
advertising expenses.Answer: Although the company will save money by advertising in its existing hotels, this
is not a change in cash flow as a result of the project and is not included in cash
flows. (In effect the benefit from the savings is present as there is no cash
outflow for advertisingIm struggling to understand this part of the solution, My doubt is Just like tax savings on depreciation which we include in the NPV calculation, shouldn’t we include savings in advertisement cost?
Thank you in advance 🙂
It is clever wording of the question.
They are currently spending money on advertising and the amount being spent will not change and so there is no change to the total cash flow.
(If they were not using the current advertising then they would have to spend $2 million, but they are using the current advertising and therefore the $2 million is irrelevant. The total advertising spend will remain as it was before with no change in the cash flow.)
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