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 1.10 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 variable cost is $9 per bottle. Fixed production costs will be $1.07 million per year, and depreciation will be $1.19 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

expected annual sales = (1,100,000*0.52) + (216,000*0.38) + (0.10*49,000)

=>658,980 bottles.

sales revenue (658,980*$40)	26,359,200
less; Variable costs (658,980*$9)	(5,930,820)
contribution margin	20,428,380
less: depreciation	(1,190,000)
less:fixed costs	(1,070,000)
Income before tax	18,168,380
less: tax @40%	(7,267,352)
net income	10,901,028
add:depreciation	1,190,000
annual incremental cash flow	12,091,028