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 websites 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 2018, 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, 2019 through 2023. With the marketing 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 net cash flows over the next 5 years associated with the proposed marketing campaign.

Transcribed Image Text:

Marcus Tube Income Statement for the Year Ended December 31, 2018 Sales revenue $20,000,000 Less: Cost of goods sold (80%) 16,000,000 $ 4,000,000 Gross profits Less: Operating expenses $ 2,000,000 General and administrative expense (10%) Depreciation expense 500,000 $ 2,500,000 $ 1,500,000 Total operating expense Earnings before interest and taxes Less: Taxes (rate = 40%) 600,000 Net operating profit after taxes 900,000 Marcus Tube Sales Forecast Year Sales revenue 2019 $20,500,000 2020 21,000,000 2021 21,500,000 2022 22,500,000 2023 23,500,000