Question

Net cash flows for a marketing campaign Marcus Tube, a manufacturer of high-quality aluminum tubing, has maintained stable sales and profits over the past 10 years. Although the market for aluminum tubing has been expanding by 3% per year, Marcus has been unsuccessful in sharing this growth. To increase its sales, the firm is considering an aggressive marketing campaign that centers on regularly running ads in all relevant trade journals and exhibiting products at all major regional and national trade shows. The campaign is expected to require an annual tax-deductible expenditure of $142,000 over the next 5 years. Sales revenue, as shown in the income statement for 2018 totaled $20,500,000. If the proposed marketing campaign is not initiated, sales are expected to remain at this level in each of the next 5 years, 2019 through 2023. With the marketing campaign, sales are expected to rise to the levels shown in the table for each of the next 5 years, cost of goods sold is expected to remain at 80% of sales, general and administrative expense (exclusive of any marketing campaign outlays) is expected to remain at 9% of sales, and annual depreciation expense is expected to remain at $490,000. Assuming a 40% tax rate, find the net cash flows over the next 5 years associated with the proposed marketing campaign. The annual operating cash flow without the marketing campaign will be $ (Round to the nearest dollar.)

Answer 1

2021 $22,000,000 $17,600,000 $4,400,000 2022 $23,000,000 $18,400,000 $4,600,000 2023 $24,000,000 $19,200,000 $4,800,000 $2,070,000 Net cash flows over the next five years associated with the marketing campaign Particulars 2019 2020 Sales revenue $21,000,000 $21,500,000 Less: Cost of goods sold (80%) $16,800,000 $17,200,000 Gross Profit $4,200,000 $4,300,000 Less: Expenses (Excluding Depreciation) General and administrative expenses(9%) $1,890,000 $1,935,000 Marketing Expenses $142,000 $142,000 Total Expenses (excluding depreciation) $2,032,000 $2,077,000 Profit before Depreciation and taxes $2,168,000 $2,223,000 Less: Depreciation $490,000 $490,000 Earnings before taxes $1,678,000 $1,733,000 Less: Taxes (40%) $671,200 $693,200 Net profit after tax $1,006,800 $1,039,800 Add: Depreciation $490,000 $490,000 Cash flows over next five years $1,496,800 $1,529,800 $1,980,000 $142,000 $2,122,000 $2,278,000 $490,000 $1,788,000 $715,200 $1,072,800 $490.000 $1,562,800 $2,212,000 $2,388,000 $490,000 $1,898,000 $759,200 $1,138,800 $490,000 $1,628,800 $2,160,000 $142,000 $2,302,000 $2,498,000 $490,000 $2,008,000 $803,200 $1,204,800 $490,000 $1,694,800 $4,100,000 Cash flows without the marketing campaign Gross Profits Less: Cash Expenses General and Administrative Expenses Taxes Total Cash Expenses Operating Cash flows without marketing campaign $1,845,000 $706,000 $2,551,000 $1,549,000 Calculation of net cash flows over the next 5 years associated with the proposed marketing campaign Cash flows with marketing campaign $1,496,800 $1,529,800 $1,562,800 Less: Cash flows without marketing campaign $1,549,000 $1,549,000 $1,549,000 Net cash flows over the next 5 years associated with the proposed marketing campaign -$52,200 -$19,200 $13,800 $1,628,800 $1,549,000 $1,694,800 $1,549,000 $79,800 $145,800