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The companys vice president of marketing proposes a new program to significantly increase the product sales by 250,000 units per year throughout the 19982004 period. Specifically, it is suggested that the company takes the following actions:

a. Spend $2.5 million over the period of 1998-2000 as promotional expendituresfor example, spend $1.0 million each in the years 1998 and 1999, and $0.5 million in the year 2000.

b. Make a one-time investment of $1.4 million in plants and equipment needed at the beginning of 1998 to generate these additional products. No new warehouse capability is needed. This investment is to be depreciated on a straight-line basis over the seven-year period. There will be no salvage values for these plants and equipment in 2005.

It is further assumed that the product unit cost is $8.00 in 1998, and it is estimated to increase by 3% per year. The product unit price is $20 in 1998, and it is estimated to change as shown in the following table:

Items	1998	1999	2000	2001	2002	2003	2004
Unit Price	$20.00	$20.60	$21.00	$21.15	$21.25	$21.25	$21.00

The SG&A expenditure is estimated at $1.25 million in 1998, and it will increase by 3% per year during the six-year period. A corporate tax of 40% must be paid for any marginal income. There is an interest charge during this period, and the companys WACC is 8%.

If the companys hurdle rate for this type of investment is 25%, would you recommend that the marketing initiative be approved?

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