Question

Premium Wines, a producer of medium-quality wines, has maintained stable sales and profits over the past eight years. Although the market for medium-quality wines has been growing by 4 % per year, Premium Wines 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 major food and wine magazines and airing TV commercials in large metropolitan areas. The campaign is expected to require an annual tax-deductible expenditure of $3 million over the next five years. Sales revenue, as noted in the following income statement for 2011, totaled $80 million. If the proposed marketing campaign is not initiated, sales are expected to remain at this level in each of the next five years, 2012-2016. With the marketing campaign, sales are expected to rise to the levels shown in the sales forecast table for each of the next five years. The cost of goods sold is expected to remain at 75 % of sales; general and administrative expense (exclusive of any marketing campaign outlays) is expected to remain at 15 % of sales; and annual depreciation expense is expected to remain at $2 million. Assuming a 40 % tax rate, find the cash flows over the next five years associated with Premium Wines’ proposed marketing campaign.
Premium Wines
Sales Forecast .
Year......... Sales Revenue
2012......... $82,000,000
2013......... $84,000,000
2014......... $86,000,000
2015......... $90,000,000
2016......... $94,000,000


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  • CreatedMarch 26, 2015
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