FIN – AAA Carfin, Inc. Solution

AAA Carfin, Inc. is considering a new expanded nation-wide marketing program.  A proposal income statement and some additional data are shown below.   (The figures are in thousands of dollars, but this need not be part of the calculations as it will not make any difference in the conclusion.)      
This proposal does not require any assets that can be depreciated.  Assume that the proposed $3,000 marketing program is all S.G.&A. expense and includes all additional the S.G. & A. expenses needed for the marketing program.      
Accounts receivable is forecasted to be 30% of revenue in each year starting with year 1.  Finished Inventory is forecast at 10% of revenue also starting in year 1.       
Accounts Payable is forecast to be $1,000 in year 0 and 20% of the cost of goods sold in each year after year 0.  Materials inventory is forecasted at $1,500 in year 0 and 15% of the cost of goods sold in the years after year 0.      
Prepare a cash flow statement and determine the present worth.      
Income Statement      
 Year 0 1 2 3 
 Sales due to marketing program  $10,500  $15,000  $25,000  
 COGS  ($6,000) ($7,500) ($12,000) 
 Gross Margin  $4,500  $7,500  $13,000  
 Marketing Program Expense  ($3,000) ($3,000) ($3,000) 
 EBIT  $1,500  $4,500  $10,000  
 Income Taxes  ($375) ($1,125) ($2,500) 
 Net Income  $1,125  $3,375  $7,500  
  year 0 Percent of  
 Accounts Receivable $0  30% Revenue  
 Finished Inventory $0  10% Revenue  
 Accounts Payable $1,000  20% COGS  
 Materials Inventory $1,500  15% COGS  
 Proposal annual cost $3,000     
 Proposal life span  3 years   
 Income tax rate 25% annually   
 MARR 10% annually (EAR)   

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