Question

Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $25,300, and the company expects to sell 1,700 per year. The company currently sells 2,050 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,720 units per year. The old board retails for $23,700. Variable costs are 57 percent of sales, depreciation on the equipment to produce the new board will be $675,000 per year, and fixed costs are $3,400,000 per year. If the tax rate is 25 percent, what is the annual OCF for the project

Answer 1

Answer:

$24,635,865

Explanation:

total cash inflows = ($25,300 x 1,700) + ($23,700 x 1,720) = $83,774,000

variable costs = $83,774,000 x 57% = $47,751,180

fixed costs = $3,400,000

depreciation expense = $675,000

tax rate = 25%

operating cash flow = [($83,774,000 - $47,751,180 - $3,400,000 - $675,000) x (1 - 25%)] + $675,000 = $23,960,865 + $675,000 = $24,635,865