Question

Given the soaring price of gasoline, Ford is considering introducing a new production line of gas-electric hybrid sedans. The expected annual unit sales of the hybrid cars is 39,000; the price is $22,000 per car. Variable costs of production are $14,000 per car. The fixed overhead including salary of top executives is $80 million per year. However, the introduction of the hybrid sedan will decrease Ford’s sales of regular sedans by 8,000 cars per year; the regular sedans have a unit price of $20,000, a unit variable cost of $12,000, and fixed costs of $250,000 per year. Depreciation costs of the production plant are $51,000 per year. The marginal tax rate is 40 percent. What is the incremental annual cash flow from operations?

Incremental annual cash flow from operations

$

Answer 1

Profit=Hybrid sales*(selling price-variable cost)-decrease in regular car sales*(selling price

-variable cost)

=39000*(22000-14000)-8000*(20000-12000)

=248000000

Time line		0	1
Profits			248000000
Fixed cost			-80000000
-Depreciation	Cost of equipment/no. of years		-51000
=Pretax cash flows			167949000
-taxes	=(Pretax cash flows)*(1-tax)		100769400
+Depreciation			51000
=after tax operating cash flow			100820400