Question

Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $24,700, and the company expects to sell 1,640 per year. The company currently sells 1,990 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,660 units per year. The old board retails for $23,100. Variable costs are 53 percent of sales, depreciation on the equipment to produce the new board will be $1,035,000 per year, and fixed costs are $3,250,000 per year. If the tax rate is 24 percent, what is the annual OCF for the project

Answer 1

Answer: $9,524,922

Explanation:

The annual OCF of the project will be calculated as

= EBIT + Depreciation - taxes

First, we have to calculate the EBIT which will be:

= [ $24,700 x 1,640 - ( 1,990-1,660 x $23,100 ]

= $40,508,000 - (330 × $23100)

= $40,508,000 - $7,623,000

= $ 32,885,000

Variable cost will then be:

= $32,885,000 × 53%

= $32,885,000 x 0.53

= $ 17,429,050

Therefore, EBIT will be:

= $32,885,000 - $ 17,429,050 - Fixed cost - depreciation

= $32,885,000 - $ 17,429,050 - $3,250,000 - $1,035,000

= $11,170,950

Then, we calculate the value of tax which will be:

= $11,170,950 x 0.24

= $2,681,028

Therefore, OCF will be:

= EBIT + Depreciation - taxes

= $11,170,950 + $1,035,000 - $2,681,028

= $9,524,922