RSTT, Inc. is looking at offering a new product. The sales of the new product are forecasted to be $900,000 in year 1 of the planning period, double in year 2, and increase by $50,000 each year thereafter. COGS for the new product are estimated at 50% of the revenue in year 1 and this percentage is reduced by 5% each year after year 1 (45% in year 2, 40% in year 3, etc.).
It is expected that sales of an existing product will be cannibalized (reduced) by $250,000 in year one and this reduction will increase by 20% per year for the remaining years in the planning period. For instance, the revenue reduction in year 2 is $250,000 +20% of this, or $300,000. The COGS for the existing product is a constant 40% of the Revenue for all years.
S.G.& A costs including depreciation are expected to be constant at $250,000 annually over the planning horizon for the new product. (e.g. you do not have to compute deprecation.) The tax rate is 15%. RSTT uses a MARR of 12%.
If the needed upfront investment would be $5 million, construct an incremental Income statement (no cash flow statement required) showing the effect on Net Earnings of the new product.
|
Year |
1 |
2 |
3 |
4 |
5 |
| Revenue New product |
|
$900,000 |
$1,800,000 |
$1,850,000 |
$1,900,000 |
$1,950,000 |
| COGS % New Product |
|
50% |
45% |
40% |
35% |
30% |
| COGS New Product |
|
$450,000 |
$810,000 |
$740,000 |
$665,000 |
$585,000 |
| Revenue decrease -Existing |
|
($250,000) |
($300,000) |
($360,000) |
($432,000) |
($518,400) |
| COGS % Existing |
|
40% |
40% |
40% |
40% |
40% |
| COGS reduction- Existing |
|
$100,000 |
$120,000 |
$144,000 |
$172,800 |
$207,360 |
| SG&A- all years |
$250,000 |
|
|
|
|
|
| Tax % |
15% |
|
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|
|
| Project time span |
5 |
years |
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