Chapter 11, Problem 11.23P

Net 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 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.

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
Gross profits	$ 4,000,000
Less: Operating expenses
General and administrative expense (10%)	$ 2,000,000
Depreciation expense	500,000
Total operating expense	$ 2,500,000
Earnings before interest and taxes	$ 1,500,000
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	21,00,000
2021	21,500,000
2022	22,500,000
2023	23,500,000