CompU is looking at starting a major advertising campaign to further expand their business. Based on preliminary estimates, the advertising campaign will cost $100,000 and will increase revenue by $80,000 per year for the next 5 years. The increased expenses excluding depreciation will be $35,000 per year. Inventory will increase by $25,000, accounts receivable will increase by $20,000, accounts payable will increase by $20,000, and accruals will increase by $15,000. The company is in the 40% tax bracket. The ad campaign will be capitalized and depreciated using a 5-year MACRS recovery schedule.
a. Calculate the initial investment associated with the advertising campaign.
b. Calculate the annual operating cash flows for the project.