A beauty product company is developing a new fragrance named Happy Forever. Ther

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?

Annual incremental cash flows $

Explanation / Answer

Probability Expected Sales (Bottles) Total number of bottles sold Love 0.51 1,090,000 555,900 Acceptable 0.39 193,000 75,270 Pleasant 0.1 45,000 4,500 Total 635,670 Sales (635,670 bottles x $36 per bottle) $22,884,120 Less: Operating Expenses Less: Variable Cost (653,670 bottles x $11 per bottle) -$6,992,370 Less: Fixed Cost -$1,000,000 Total Operating Expenses -$7,992,370 EBITDA $14,891,750 Less: Depreciation -$1,210,000 EBIT $13,681,750 Less: Tax @ 40% -$5,472,700 NOPAT $8,209,050 Add: Depreciation $1,210,000 Cash flow from Operation $9,419,050 Less: Capital Expenditure $0 Less: Average Working Capital $0 Expected annual incremental after-tax free cash flows $9,419,050

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