Question

19 Saved Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $24,500, and the company expects to sell 1,620 per year. The company currently sells 1,970 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,640 units per year. The old board retails for $22,900. Variable costs are 57 percent of sales, depreciation on the equipment to produce the new board will be $1,155,000 per year, and fixed costs are $3,200,000 per year. If the tax rate is 22 percent, what is the annual OCF for the project? (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.) OCF

Answer 1

Operating cash flow

New board sales ( Units)	1620
Contribution per Unit = 24500 * ( 1 - 0.57)	10535
Total contribution	17066700
(-) Fixed costs	3,200,000
(-) Depreciation	1,155,000
(-) Contribution lost on old board	3446450
Profit before tax	9,265,250
(-) Tax	2038355
Profit after tax	7,226,895
(+) Depreciation	1,155,000
OCF …… Operating cash flows	8,381,895

Explanation

Variable cost = 57% was given. It implies that 43% will be contribution margin.

Sale of old boards drops from 1970 to 1620 = 350 Units.

Contribution lost = 350 units * 22900 * 0.43 = 3446450. This should be subtracted from contribution earned by new board to determine the relevant cash flow for the project.

Tax = 9265250 * 0.22 = 2038355