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 4 % 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 $146,000 over the next 5 years. Sales revenue, as shown in the income statement for 2018 , totaled $20, 100,000. If the proposed marketing campaign is not initiated, sales are expected to remain at this level the levels shown in the table for each of the next 5 years; cost of goods sold is expected to remain at 75 % of sales; general and administrative expense (exclusive of any marketing campaign outlays) is expected to remain at 12% 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. each of the next 5 years, 2019 through 2023. With the marketing campaign, sales are expected to rise to The annual operating cash flow without the marketing campaign will be S iData Table X (Round Data Takle (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet. Marcus Tube Income Statement for the Year Ended December 31, 2018 (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) $20 100 000 15,075 000 $5,025.000 Marcus Tube Sales Forecast Sales revenue $20,600,000 21.100.000 21,600,000 22,600,000 23,600,000 Sales revenue Less. Cost of goods sold (75 %) Gross profits Less: Operating expenses General and administrative expense (12%) Depreciation expense Total operating expense Earnings before interest and taxes Less: Taxes (4095 Net operating profit ater texes Year 2019 2020 S2,412,000 490,000 2021 2022 2023 $2.902,000 $2 123.000 849.200 $1 273 800 Print Done Deint Copyright 2019 Pearson Education Inc Allrights reserved. Termsof use Privecy Policy 1 Permissions Contact

Answer 1

Calculation of operating cash flow without a marketing campaign
Sales revenue	$ 20,100,000
Less: COGS-75%	$ (15,075,000)
Gross profit	$    5,025,000
Less: General & administrative expense-12%	$   (2,412,000)
Less: Depreciation	$      (490,000)
Earning before interest and tax	$    2,123,000
Less: Tax @ 40%	$      (849,200)
Net operating profit after tax	$    1,273,800
Add: Depreciation	$        490,000
Cash profit after tax	$    1,763,800

Calculation of operating cash flow with the marketing campaign

Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4	Year-5
Sale		$      20,600,000	$     21,100,000	$      21,600,000	$      22,600,000	$     23,600,000
Less: Operating Cost-75%		$      15,450,000	$     15,825,000	$      16,200,000	$      16,950,000	$     17,700,000
Contribution		$       5,150,000	$       5,275,000	$       5,400,000	$       5,650,000	$       5,900,000
Less: General & Admin cost @ 12%		$        2,472,000	$       2,532,000	$        2,592,000	$        2,712,000	$       2,832,000
Less: Marketting cost		$           146,000	$          146,000	$           146,000	$           146,000	$           146,000
Less: Depreciation		$           490,000	$          490,000	$           490,000	$           490,000	$           490,000
Profit before tax		$       2,042,000	$       2,107,000	$       2,172,000	$       2,302,000	$       2,432,000
Tax @ 40%		$           816,800	$          842,800	$           868,800	$           920,800	$           972,800
Profit After Tax		$       1,225,200	$       1,264,200	$       1,303,200	$       1,381,200	$       1,459,200
Add Depreciation		$           490,000	$          490,000	$           490,000	$           490,000	$           490,000
Cash Profit after-tax		$       1,715,200	$       1,754,200	$       1,793,200	$       1,871,200	$       1,949,200