Looking forward to next year, Zyco Corp is thinking about investing in an advertising plan to burnish their products image: thinking traditional paid media outlets like television commercials and non-traditional with a social media based campaign using bloggers and company “friends”.
The budget from the ad agency for the traditional media is $100,000 with a recommendation to advertise mainly on cable and during the early morning hours thinking that viewers will listen without thinking much about the ads and cable late at night where viewers are used to more advertisements and are less likely to try to do something else during the spot because they are tired. The agency will save Zyco Corp money by committing to the air times up front so will need their fee at kick off. It is expected that the ads will generate $100,000 worth of goodwill by year end which will decrease evenly to zero by the end of year 5.
For the social networking strategy, the company will need to hire two employees, salary and benefits will equal $63,000 per year each, who will create Facebook and other social site profiles and establish a blog to talk favorably about products that use trans fats as a core ingredient and to interject an opposing point of view when the use of trans fats is attacked. The VP of Marketing estimates that this social program will create $150,000 of value by year end but this value will be cut in half for year 2 and disappear by year 3.
For analysis treat all benefits as year end benefits. The company pays monthly and its cost of capital is 12%. What is the financial merit of these ideas?