Question

A beauty product company is developing a new fragrance named Happy Forever. There is a probability of 0.48 that consumers will love Happy Forever, and in this case, annual sales will be 1.04 million bottles; a probability of 0.38 that consumers will find the smell acceptable and annual sales will be 211,000 bottles; and a probability of 0.14 that consumers will find the smell unpleasant and annual sales will be only 48,000 bottles. The selling price is $36, and the variable cost is $9 per bottle. Fixed production costs will be $1.04 million per year, and depreciation will be $1.17 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

Solution: Calculation of Total Sales in Units

Probability	Sales (Units)	Probability x Sales (units)
0.48	1040000	4,99,200
0.38	211000	80,180
0.14	48000	6,720
		5,86,100

Therefore, total bottles expected to be sold = 586,100 Bottles

Particulars	$
Sales	2,10,99,600
Less: Variable Costs ($9 Per Bottle)	52,74,900
Less: Fixed Costs	10,40,000
Net Profit Before Depreciation and Tax	1,47,84,700
Less: Depreciation	11,70,000
Net Profit Before Tax	1,36,14,700
Less: Tax 40%	54,45,880
Net Profit After Tax	81,68,820
Cash Inflows = Net Profit After Tax + Depreciation	93,38,820

Therefore, Incremental Cash inflows of the project is $9,338,820