P11-23 Net cash flows for a marketing campaign

MarcusTube, a manufacturer ofhigh-quality aluminumtubing, has maintained stable sales and profits over the past 10 years. Although the market for aluminum tubing has been expanding by 5% peryear, Marcus has been unsuccessful in sharing this growth. To increase itssales, the firm is considering an aggressive marketing campaign that centers on regularly running ads in all relevant trade journals and exhibiting products at all major regional and national trade shows. The campaign is expected to require an annualtax-deductible expenditure of $143,000 over the next 5 years. Salesrevenue, as shown in the income statement for 2018 $20,800,000. If the proposed marketing campaign is notinitiated, sales are expected to remain at this level in each of the next 5years, 2019 through 2023. With the marketingcampaign, sales are expected to rise to the levels shown in the table for each of the next 5years; cost of goods sold is expected to remain at 70 % ofsales; general and administrative expense(exclusive of any marketing campaignoutlays) is expected to remain at 8 % ofsales; and annual depreciation expense is expected to remain at $520,000. Assuming a 40% taxrate, find the net cash flows over the next 5 years associated with the proposed marketing campaign.

Marcus Tube Income Statement for

the Year Ended December31, 2018

Sales revenue $20,800,000

Less: Cost of goods sold (70 %) 14,560,000

Gross profits $6,240,000

Less: Operating expenses

General and administrative expense (8 %) $1,664,000

Depreciation expense 520,000

Total operating expense $2,184,000

Earnings before interest and taxes $4,056,000

Less: Taxes (40 %) 1,622,400

Net operating profit after taxes $2,433,600

Marcus Tube Sales Forecast

Year Sales revenue 2019

2019 $21,300,000

2020 21,800,000

2021 22,300,000

2022 23,300,000

2023 24,300,000