) Brooke Burke Corporation is considering a new product line. The company curren
ID: 2667102 • Letter: #
Question
) Brooke Burke Corporation is considering a new product line. The company currently manufactures severallines of snow skiing apparel. The new products, insulated ski bikinis, are expected to generate sales of $1
million per year for the next five years. They expect that during this five-year period, they will lose about
$250,000 in sales on their existing lines of longer ski pants. The new line will require no additional equipment
or space in the plant and can be produced in the same manner as the apparel products. The new project will,
however, require that the company spend an additional $80,000 per year on insurance in case customers sue
for frostbite. Also, a new marketing director would be hired to oversee the line at $45,000 per year in salary and
benefits. Because of the different construction of the bikinis, an increase in inventory of 3,800 would be required
initially. If the marginal tax rate is 30 percent, compute the incremental after tax cash flows for years 1-5.
A)$434,500 per year
B)$437,500 per year
C)$187,500 per year
D)$625,000 per year
Explanation / Answer
B.) $437,500 Sales $1,000,000 Less Decrease in Sale of Pants $(250,000) Less Salry of Mng Dir $(45,000) Less Addl Insu $(80,000) Gross CF $625,000 Less Tax 30% $(187,500) Inc Cash Flow $437,500
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