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 taxdeductible expenditure of $150,000 over the next 5 years. Sales revenue, as shown in the accompanying income statement for 2012, 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, 2013 through 2017. With the marketing campaign, sales
Relevant
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 taxdeductible expenditure of $150,000 over the next 5 years. Sales revenue, as shown
in the accompanying income statement for 2012, 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, 2013 through 2017. With the marketing campaign, sales
CHAPTER 11 Capital Budgeting Cash Flows 457
LG 6
Marcus Tube Income Statement for
the Year Ended December 31, 2012
Sales revenue $20,000,000
Less: Cost of goods sold (80%)
Gross profits
Less: Operating expenses
General and administrative expense (10%) $2,000,000
Total operating expense
Earnings before interest and taxes $ 1,500,000
Less: Taxes (rate 40%)
Net operating profit after taxes $ 900,000
= 600,000
$ 2,500,000
500,000
$ 4,000,000
16,000,000
Marcus Tube Sales Forecast
Year Sales revenue
2013 $20,500,000
2014 21,000,000
2015 21,500,000
2016 22,500,000
2017 23,500,000
LG 3 LG 4
LG 5 LG 6
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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