Problem
I. Amazing Cosmetics currently manufactures a brand of makeup called Glowing. Management is considering introducing an improved makeup brand called Irresistible. Management expects that sales of Irresistible will be $10 million per year. While many of these sales will be to new customers, management estimates that 20% will come from customers who switch from Glowing to Irresistible.
i. Assume customers will spend the same amount on either makeup brand. What level of incremental sales is associated with introducing the Irresistible brand?
ii. Suppose that 50% of the customers who will switch from Glowing to Irresistible will switch to another company's brand if Amazing Cosmetics does not introduce a new makeup brand. What level of incremental sales is associated with introducing the new makeup brand in this case?
II. Deluxe Delivery is a delivery service that reported a net income of $20 million for the most recent fiscal year. The firm had depreciation expenses of $9 million, capital expenditures of $12 million, and no interest expenses. Working capital increased by $1 million. Calculate the free cash flow for Deluxe Delivery for the most recent fiscal year.