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 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 income statement for 2003 (below), 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, 2004-2008. 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 relevant cash flows over the next 5 years associated with the proposed marketing campaign.
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Marcus Tube
Income Statement
for the Year Ended December 31, 2003
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Sales revenue
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$20,000,000
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Less: Cost of goods sold (80%)
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16,000,000
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Gross profits
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$4,000,000
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Less: Operating expenses
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General and administrative expense (10%)
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$2,000,000
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Depreciation expense
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500,000
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Total operating expense
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2,500,000
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Net profits before taxes
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$1,500,000
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Less: Taxes (rate = 40%)
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600,000
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Net profits after taxes
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$900,000
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Marcus Tube
Sales Forecast
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Year
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Sales revenue
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2004
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$20,500,000
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2005
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21,000,000
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2006
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21,500,000
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2007
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22,500,000
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2008
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23,500,000
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