Question

NPV. Huffman Systems has forecasted sales for its new home alarm systems to be 63,000 units per year at $39.00 per unit. The cost to produce each unit is expected to be about 42% of the sales price. The new product will have an additional $490,000 of fixed costs each year, and the manufacturing equipment will have an initial cost of $2,410,000 and will be depreciated over eight years (straight line). The company tax rate is 35%. What is the annual operating cash flow for the alarm systems if the projected sales and price per unit are constant over the next eight years? Should Huffman Systems add the new home alarm system to its set of products? The manufacturing equipment will be sold off at the end of eight years for $210,000, and the cost of capital for this project is 14% What is the annual operating cash flow of the new alarm systems? $ (Round to the nearest dollar.)

Answer 1

Time line		0	1
Cost of new machine		-2410000
=Initial Investment outlay		-2410000
Unit sales			63000
Profits	=no. of units sold * (sales price - variable cost)		1425060
Fixed cost			-490000
-Depreciation	Cost of equipment/no. of years		-301250
=Pretax cash flows			633810
-taxes	=(Pretax cash flows)*(1-tax)		411976.5
+Depreciation			301250
=after tax operating cash flow			713226.5