Chip Chip\'s Home Brew Whiskey management forecasts that if the firm sells each

Question

Chip Chip's 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 84 percent as high if the price is raised 8 percent. Chip's 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's FCF for the year?

Explanation / Answer

for option 1

selling price = 20

demand = 15000

revenue = 300000

variable cost = 150000

fixed cost = 100000

deprication =20000

Earnings before tax = 30000

tax = -9000

net income = 21000

add depriciation = 20000

net cash flow = 41000

less working capital = -3000

cash flow = 38000............ans1

for option 2

selling price = 21.6

demand = 12600

revenue = 272160

variable cost = 126000

fixed cost = 100000

deprication =20000

Earnings before tax = 26160

tax = -7848

net income = 18312

add depriciation = 20000

net cash flow = 38312

less working capital = -3000

cash flow = 35312.....ans 2

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