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, annual sales will be 1.03
million bottles; a probability of 0.41 that consumers will find the
smell acceptable and annual sales will be 179,000 bottles; and a
probability of 0.07 that consumers will find the smell unpleasant
and annual sales will be only 49,000 bottles. The selling price is
$38, and the variable cost is $8 per bottle. Fixed production costs
will be $1.00 million per year, and depreciation will be $1.20
million. Assume that the marginal tax rate is 40 percent. What are
the expected annual incremental after-tax free cash flows from the
new fragrance?
Annual incremental after tax free cash flow=(Expected
volume*(Price-Variable Cost)-Fixed Cost-Depreciation)*(1-tax
rate)+Depreciation=((0.52*1.03*10^6+0.41*179000+0.07*49000)*(38-8)-1*10^6-1.20*10^6)*(1-40%)+1.20*10^6
=10903560
A beauty product company is developing a new fragrance named Happy Forever. There is a probability...
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, annual sales will be 1.10 million bottles; a probability of 0.38 that consumers will find the smell acceptable and annual sales will be 216,000 bottles; and a probability of 0.10 that consumers will find the smell unpleasant and annual sales will be only 49,000 bottles. The selling price is $40, and the...
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