Question

A beauty product company is developing a new fragrance named Happy Forever. There is a probability of 0.51 that consumers will love Happy Forever, and in this case, annual sales will be 1.09 million bottles; a probability of 0.39 that consumers will find the smell acceptable and annual sales will be 193,000 bottles; and a probability of 0.10 that consumers will find the smell unpleasant and annual sales will be only 45,000 bottles. The selling price is $36, and the variable cost is $11 per bottle. Fixed production costs will be $1.00 million per year, and depreciation will be $1.21 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?

Answer 1

Sales	× Prob	Expected
1,090,000	0.51	555,900
193,000	0.39	75,270
45,000	0.10000	4,500
Expected sales		635,670

Particulars	Amount
Sales units	635,670
× Contribution per unit	25
Contribution	15,891,750
Costs:
Fixed costs	(1,000,000)
Depreciation	(1,210,000)
Profit before tax	13,681,750
Less: tax	(5,472,700)
Add: depreciation	1,210,000
Incremental cash flow	9,419,050

Answer is:

9,419,050

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