Question

Operating cash flow. Huffman Systems has forecasted sales for its new home alarm systems to be 65,000 units per year at $40.00 per unit The cost to produce each unit is expected to be about 40 % 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 $3,000,000 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? What is the annual operating cash flow for the alarm systems? (Round to the nearest dollar)

Answer 1

Time line		0	1
Cost of new machine		-3000000
=Initial Investment outlay		-3000000
Unit sales			65000
Profits	=no. of units sold * (sales price - variable cost)		1560000
Fixed cost			-490000
-Depreciation	Cost of equipment/no. of years		-375000
=Pretax cash flows			695000
-taxes	=(Pretax cash flows)*(1-tax)		451750
+Depreciation			375000
=after tax operating cash flow			826750