Question
Lereve, a perfume company is developing a new fragrance named Gorgeous. There is a probability of 0.5 that consumers will love Gorgeous and, in this
Lereve, a perfume company is developing a new fragrance named Gorgeous. There is a probability of 0.5 that consumers will love Gorgeous and, in this case annual sales will be 1 million bottles; a probability of 0.4 that consumers will find the smell acceptable and annual sales will be 200 000 bottles; and a probability of 0.1 that consumers will find the smell weird and annual sales will be only 50 000 bottles. The selling price is $38, and the variable cost is $8 per bottle. Fixed production costs will be $1 million per year and depreciation costs are $1.2 million. Assume that the tax rate is 30 per cent. What are the expected annual incremental cash flows from the new fragrance?
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