Question

A beauty product company is developing a new fragrance named Happy Forever. There is a probability of 0.47 that consumers will love Happy Forever, and in this case, annual sales will be 1.08 million bottles; a probability of 0.39 that consumers will find the smell acceptable and annual sales will be 220,000 bottles; and a probability of 0.14 that consumers will find the smell unpleasant and annual sales will be only 50,000 bottles. The selling price is $39, and the variable cost is $10 per bottle. Fixed production costs will be $1.01 million per year, and depreciation will be $1.18 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 $___________

Answer 1

rate positively ... let me know if you need any clarification..

			love Happy Forever	smell acceptable	smell unpleasant
i	Sales		1,080,000	220,000	50,000
ii	Selling price		39	39	39
iii=i*ii	Total sales		42,120,000	8,580,000	1,950,000
iv	Variable cost		10,800,000	2,200,000	500,000
v	Fixed cost		1,010,000	1,010,000	1,010,000
vi	Depreciation		1,180,000	1,180,000	1,180,000
vii=iv+v+vi	Total cost		12,990,000	4,390,000	2,690,000
vii=iii-iv	Profit before tax		29,130,000	4,190,000	(740,000)
viii=vii*40%	Tax @ 40%		11,652,000	1,676,000	(296,000)
ix=vii-viii	Profit after tax		17,478,000	2,514,000	(444,000)
x=ix+vi	Cash flow		18,658,000	3,694,000	736,000
xi	Probability =		0.47	0.39	0.14
xii=xi*x	expected annual cash flow		8,769,260	1,440,660	103,040	10,312,960
	Ans =		10,312,960