Question
Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $5 million on
Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $5 million on TV, radio, and print advertising this year for the campaign. The ads are expected to boost sales of the Mini Mochi Munch by $11 million this year and by $8 million next year. In addition, the company expects that new consumers who try the Mini Mochi Munch will be more likely to try Kokomochis other products. As a result, sales of other products are expected to rise by $3 million each year.
Kokomochis gross profit margin for the Mini Mochi Munch is 35%, and its gross profit margin averages 25% for all other products. The companys marginal corporate tax rate is 21% both this year and next year. Its an ad campaign project so Kokomochi does not need to make any capital expenditure (i.e., initial inevestment = 0). There is no effect on Depreciation, too (i.e., Depreciation = 0). Assume that the level of NWC needed for the ad campaign is 10% of the additional sales amounts. For example, project NWC in this year will be 10% of this years sales, which is ($11 + $3)*10% = $1.4 million. Calculate change in NWC as (this years project NWC Last years project NWC). For example, this years Change in NWC = $1.4 million 0 = $1.4 million. Next years change in NWC = Next years NWC This years NWC = Next years NWC - $1.4 million. Please remember, the company does not need this project NWC after the project ends and the company fully recovers the project NWC investments by the year after the project ends. Assuming this is a 2-year project, the NWC investments will be recovered by year 3. The year-3 change in NWC will be =year-3 NWC year-2 NWC= 0 - year2 NWC = - year2 NWC. (Please review the IBM case that we worked on in the class for help.)
Question: Now calculate the project Free Cash Flows as
FCF = Unlevered Net Income + Depreciation Capex Change in NWC.
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