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 5% per year, Marcus has been unsuccessful in sharing this growth. To increase its sales, the firm is considering an aggressive marketing campaign 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 $155,000 over the next 5 years. Sales revenue, as shown in the income statement for 2018:

Marcus Tube Income Statement for The Year Ended December 31, 2018

Sales Revenue	$20,400,000
Less: Cost of good sold (79%)	16,116,000
Gross profits	4,284,000
Less: Operating expenses
General and administration expense (8%)	$ 1,632,000
Depreciation expense	480,000
Total operating expense	$ 2,112,000
Earnings before interest and taxes	2,172,000
Less taxes (40%)	868,800
Net operating profit after taxes	$ 1,303,200

totaled $20,400,000. 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. Wit the marketing campaign, sales are expected to rise to the levels shown in the table:

Marcus Tube Sales Forecast

Year	Sales Revenue
2019	$20,900,000
2020	$21,400,000
2021	$21,900,000
2022	$22,900,000
2023	$23,900,000

for each of the next 5 years; costs of goods sold is expected to remain at 79% of sales, general and administrative expense (exclusive of any marketing campaign outlays) is expected to remain at 8% of sales, and annual depreciation expense is expected to remain at $480,000. 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 market campaign will be ?

Answer 1

Particular	2018	2019	2020	2021	2022	2023
Sales Revenue	20,400,000	20,900,000	21,400,000	21,900,000	22,900,000	23,900,000
Less: Cost of goods sold	16,116,000	16,511,000	16,906,000	17,301,000	18,091,000	18,881,000
Gross Profit	4,284,000	4,389,000	4,494,000	4,599,000	4,809,000	5,019,000
Less: Operating Expenses
General and administration expense (8%)	1,632,000	1,672,000	1,712,000	1,752,000	1,832,000	1,912,000
Depreciation expense	480,000	480,000	480,000	480,000	480,000	480,000
Marketing Expenditure		155,000	155,000	155,000	155,000	155,000
Total operating expense	2,112,000	2,307,000	2,347,000	2,387,000	2,467,000	2,547,000
Earnings before interest and taxes	2,172,000	2,082,000	2,147,000	2,212,000	2,342,000	2,472,000
Less taxes (40%)	868,800	832,800	858,800	884,800	936,800	988,800
Net operating profit after taxes	1,303,200	1,249,200	1,288,200	1,327,200	1,405,200	1,483,200
Add: Taxes	868,800	832,800	858,800	884,800	936,800	988,800
Add: Depreciation	480,000	480,000	480,000	480,000	480,000	480,000
Net Cash Flow	2,652,000	2,562,000	2,627,000	2,692,000	2,822,000	2,952,000
Less: Tax @ 40%	1,060,800	1,024,800	1,050,800	1,076,800	1,128,800	1,180,800
Net Cash Flow after tax	1,591,200	1,537,200	1,576,200	1,615,200	1,693,200	1,771,200