A company is considering offering a new product. The sales of the new product are forecasted to be $700,000 in year 1 of the planning period, double in year 2, and increase by $50,000 each year thereafter. COGS for the new product are estimated at 50% of the revenue in year 1 and this percentage is reduced by 5% each year after year 1 (45% in year 2, 40% in year 3, etc.).
It is expected that sales of an existing product will be cannibalized (reduced) by $250,000 in year one and this reduction will increase by 20% per year for the remaining years in the planning period. For instance, the revenue reduction in year 2 is $250,000 +20% of this, or $300,000. The COGS for the existing product is a constant 40% of the Revenue for all years.
S.G.& A costs including depreciation are expected to be constant at $250,000 annually over the planning horizon for the new product. (e.g. you do not have to compute deprecation.) The tax rate is 15%. The company uses a MARR of 13%.
If the needed upfront investment would be $6 million, construct an incremental Income statement (no cash flow statement required) showing the effect on Net Earnings of the new product.
Incremental income statement