P1123 Relevant cash flows for a marketing campaign Marcus Tube, a manufacturer of

high-quality aluminum tubing, has maintained stable sales and profits over the past

10 years. Although the market for aluminum tubing has been expanding by 3% per

year, Marcus has been unsuccessful in sharing this growth. To increase its sales, the

firm is considering an aggressive marketing campaign that centers on regularly running

ads in all relevant trade journals and web sites and exhibiting products at all

major regional and national trade shows. The campaign is expected to require an

annual tax-deductible expenditure of $150,000 over the next 5 years. Sales revenue,

as shown in the accompanying income statement for 2015, totaled $20,000,000. If

the proposed marketing campaign is not initiated, sales are expected to remain at

this level in each of the next 5 years, 2016 through 2020. With the marketing

Sales revenue $20,000,000

Less: Cost of goods sold (80%) 16,000,000

Gross profits $ 4,000,000

Less: Operating expenses

General and administrative expense (10%) $ 2,000,000

Depreciation expense 500,000

Total operating expense $ 2,500,000

Earnings before interest and taxes $ 1,500,000

Less: Taxes (rate 5 40%) 600,000

Net operating profit after taxes 900,000

Marcus Tube Income Statement for

the Year Ended December 31, 2015

Year Sales revenue

2016 $20,500,000

2017 21,000,000

2018 21,500,000

2019 22,500,000

2020 23,500,000

Marcus Tube Sales

Forecast

campaign, sales are expected to rise to the levels shown in the accompanying table

for each of the next 5 years; cost of goods sold is expected to remain at 80% of

sales; general and administrative expense (exclusive of any marketing campaign outlays)

is expected to remain at 10% of sales; and annual depreciation expense is expected

to remain at $500,000. Assuming a 40% tax rate, find the relevant cash

flows over the next 5 years associated with the proposed marketing campaign.