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 83 percent as high if the price is raised 9 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? (Round answers to nearest whole dollar, e.g. 5,275.)

Explanation / Answer

Hi,

Part A:

15000*(20 - 10) - 100000 -20000 = 30000*(1-.30) + 20000 - 3000 = 38000

Part B:

15000*.83*(20*(1+.09) - 10) - 100000 -20000 = 26910*(1-.30) + 20000 - 3000 = 35837

Thanks.

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