Question

A beauty product company is developing a new fragrance named Happy Forever. There is a probability of 0.52 that consumers will love Happy Forever and in this case, anual sales will be 1.10 million bottles a probability of 0.39 that consumers will find the smell acceptable and annual sales will be 222.000 bottles and a probability of 0.09 that consumers will find the smellunpleasant and annual sales will be only 55,000 bottles. The selling price is $37, and the variable cost is $9 per bottle. Fred production costs will be 5108 million per year, and depreciation will be $1.17 million Assume that the marginal tax rate is 40 percent. What are the expected annual incrementalater tax free cash flows from the new fragrance Annual incremental cash flows $

Answer 1

Expected Unit Sales = 0.52 x 1,100,000 + 0.39 x 222,000 + 0.09 x 55,000 = 663,530 bottles

Sales = 663,530 x 37 = $24,550,610

VC = 663,530 x 9 = 5,971,770

Sales	24,550,610
VC	(5,971,770)
FC	(1,080,000)
Depreciation	(1,170,000)
EBT	16,328,840
Tax (40%)	(6,531,536)
Profits	9,797,304
CF	10,967,304

Cash Flow (CF) = Profits + Depreciation