Question

Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $24,600, and the company expects to sell 1,630 per year. The company currently sells 1,980 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,650 units per year. The old board retails for $23,000. Variable costs are 52 percent of sales, depreciation on the equipment to produce the new board will be $1,095,000 per year, and fixed costs are $3,225,000 per year. If the tax rate is 23 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.)

Answer 1

In the given question, with the introduction of the new product, the sale of old product will go down and hence contribution lost from old equipment should be recovered/considered while computing the operating cash flow of new product:

Calculation of contribution lost
		Year-1
No of units (1980-1650)		330.00
Selling price		$             23,000
Operating cost-52% of the selling price		$             11,960
Sale		$        7,590,000
Less: Operating Cost		$        3,946,800
Contribution		$       3,643,200

Calculation of annual operating cash flow
No of units		1,630.00
Selling price		$             24,600
Operating cost- 52% of the selling price		$             12,792
Sale		$      40,098,000
Less: Operating Cost		$      20,850,960
Contribution		$     19,247,040
Less: contribution lost		$        3,643,200
Less: fixed cost		$        3,225,000
Less: Depreciation		$        1,095,000
Profit before tax		$     11,283,840
Tax@23%		$        2,595,283
Profit After Tax		$       8,688,557
Add Depreciation		$        1,095,000
Cash Profit after-tax		$       9,783,557