Question

Burke's Comer currently sells blue jeans and T-shirts. Management is considering adding fleece tops to its inventory to provide a cooler weather option. The tops would sell for $49 each with expected sales of 4,500 tops annually. By adding the fleece tops, management feels the firm will sell an additional 305 pairs of jeans at $61 a pair and 440 fewer T-shirts at $22 each. The variable cost per unit is $32 on the jeans, $12 on the T-shirts, and $27 on the fleece tops. With the new item, the depreciation expense is $29,000 a year and the fixed costs are $78,000 annually. The tax rate is 40 percent. What is the project's operating cash flow? Multiple Choice O O O O

Answer 1

Project’s operating cash flow (OCF) of a year can be calculated in following manner

Operating cash flow (OCF) = (Revenue -Variable cost - fixed cost - Depreciation) *(1 – Tax rate) + Depreciation

Where,

Total revenue = revenue from sale of fleece tops + revenue from selling additional units of jeans – revenue loss due to fewer sale of T-shirts

= 4,500 * $49 + 305 * $61 – 440 * $22 = $229,425

Variable cost = Variable cost of fleece tops + Variable cost of additional units of jeans – Variable cost of T-shirts

= 4,500 * $27 + 305 * $32 – 440 * $12 = $125,980

Fixed cost per year = $78,000

Depreciation = $29,000

Tax rate = 40%

Therefore,

Project’s operating cash flow (OCF) = ($229,425 – $125,980 - $78,000 - $29,000) * (1 – 0.40) + $29,000

OCF = -$3,555 * (1 – 0.40) + $29,000

OCF = - $2,133 +$29,000

OCF =$26,867

Project’s operating cash flow (OCF) is $26,867

Therefore correct answer is option: $26,867