Chips Home Brew Whiskey management forecasts that if the firm sells each bottle

Question

Chips Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 91 percent as high if the price is raised 11 percent. Chips variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firms FCF for the year? (Round answers to nearest whole dollar, e.g. 5,275.)

Explanation / Answer

Hi,

Please find the detailed answer as follows;

Current Free Cash Flow = (15000*(20 - 10) - 100000 - 20000)*(1-.30) + 20000 - 3000 = $38000

Free Cash Flow after Price Increase = (15000*91%*(20*(1+.10) - 10) - 100000 - 20000)*(1-.30) + 20000 - 3000 = $47660

Free Cash Flow will increase by = 47660 - 38000 = $9660.

Thanks.

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