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, annual sales will be 1.07 million bottles; a probability of 0.38 that consumers will find the smell acceptable and annual sales will be 170,000 bottles; and a probability of 0.10 that consumers will find the smell unpleasant and annual sales will be only 53,000 bottles. The selling price is $38, and the variable cost is $10 per bottle. Fixed production costs will be $1.03 million per year, and depreciation will be $1.15 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 cash flows

$enter the Annual incremental cash flows in dollars

Answer 1

expected annual sales = (1,070,000*0.52) + (0.38*170,000) + (0.10*53,000)

=>556,400+64,600 + 5,300

=>626,300.

sales revenue (626,300*$38)	23,799,400
less; Variable costs (626,300*$10)	(6,263,000)
contribution margin	17,536,400
less: depreciation	(1,150,000)
less:fixed costs	(1,030,000)
Income before tax	15,356,400
less: tax @40%	(6,142,560)
net income	9,213,840
add:depreciation	1,150,000
annual incremental cash flow	10,363,840