Question

Mountain Recreation, Inc. is considering a new product line. The company currently manufactures several lines of snow skiing apparel. The new products, insulated ski bikinis, are expected to generate sales of $1.2 million per year for the next five years. They expect that during this five-year period, they will lose about $150,000 each year in sales on their existing lines of longer ski pants. The new line will require no additional equipment or space in the plant and can be produced in the same manner as the apparel products. The new project will, however, require that the company spend an additional $50,000 per year on insurance in case customers sue for frostbite. Also, a new marketing director would be hired to oversee the line at $75,000 per year in salary and benefits. Because of the different construction of the bikinis, an increase in inventory of $9,000 would be required initially. If the marginal tax rate is 35%, compute the incremental after tax cash flows for years 1-5.A) $537,500 per yearB) $625,000 per yearC) $634,500 per yearD) $601,250 per year

Answer 1

Answer:

D) $601,250 per year

Explanation:

expected sales increase (insulated bikinis)       $1,200,000

lost sales (longer ski pants)                                  ($150,000)

additional insurance costs                                    ($50,000)

salaries for new marketing director                      ($75,000)

incremental cash flow                                           $925,000

taxes (35%)                                                            ($323,750)

incremental cash flow after taxes                         $601,250