Chip%u2019s Home Brew Whiskey management forecasts that if the firm sells each b

Question

Chip%u2019s 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 88 percent as high if the price is raised 9 percent. Chip%u2019s 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 firm%u2019s FCF for the year? (Round answers to nearest whole dollar, e.g. 5,275.)

At $20 per bottle the Chip%u2019s FCF is $ __________ and at the new price Chip%u2019s FCF is $ _______

Explanation / Answer

Hi,

Please find the answer as follows:

Part 1:

EBIT = 15000*(20 - 10) - 100000 (Fixed Cost) - 20000 (Depreciation) = 30000

Net Income = 30000*(1-.30) = 21000

Free Cash Flow = 21000 + 20000 (Depreciation) - 3000 (Working Capital) = 38000

Part 2:

EBIT = 15000*.88*(20*(1+.09) - 10) - 100000 (Fixed Cost) - 20000 (Depreciation) = 35760

Net Income = 35760*(1-.30) = 25032

Free Cash Flow = 25032 + 20000 (Depreciation) - 3000 (Working Capital) = 42032

Thanks.

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