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There is a mtq question in the exam kit,
we’ve been given advertising campaign $2000, estimated revenue increase of 10% from current level of $50000 per year. the contribution earned on revenue is 30%
What is the present value of the incremental contribution cash flow?in the solution they have given 50000 x 0.3 x 3.670 x 0.08
where did the 0.08 come from?I have no idea because you cannot possibly have typed out the whole question. You have not said what the rate of interest is and you have not given the timing of the flows.
Either you have mistyped the question or the answer, or it is completely wrong.
The incremental revenue is not 50,000. It is 5,000. The discount factor is not 3.670, it is 3.170. I have no idea where 0.8 has appeared from – maybe the question says that there is tax of 20%?
IRR and cost of capital are certainly not the same. I suggest that you watch my free lectures on this.
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