Question

You are considering two possible marketing campaigns for a new product. The first marketing campaign requires an outlay next year of 2M, and then will pay 0.24M in all subsequent years. The second marketing campaign requires an outlay of 3M next year and then will pay 0.27M in all subsequent years.

What is the IRR for the first marketing campaign?

Answer 1

The IRR is a used by to estimate the profitability of the marketing campaigns.

The IRR for the first marketing campaign is 12%.

The given parameters are:

First marketing campaign

$\mathbf{Outlay\ Next\ Year = 2M}$

$\mathbf{Subsequent\ Years = 0.24M}$

Second marketing campaign

$\mathbf{Outlay\ Next\ Year = 3M}$

$\mathbf{Subsequent\ Years = 0.27M}$

The IRR of the first marketing campaign is calculated as follows:

$\mathbf{IRR = \frac{Subsequent\ Years}{Outlay\ Next\ Year}}$

So, we have:

$\mathbf{IRR = \frac{0.24M}{2M}}$

Cancel out common factors

$\mathbf{IRR = \frac{0.24}{2}}$

$\mathbf{IRR = 0.12}$

Express as percentage

$\mathbf{IRR = 0.12 \times 100\%}$

So, we have:

$\mathbf{IRR = 12\%}$

Hence, the IRR for the first marketing campaign is 12%.

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