Question

Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $25,200, and the company expects to sell 1,690 per year. The company currently sells 2,040 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,710 units per year. The old board retails for $23,600. Variable costs are 58 percent of sales, depreciation on the equipment to produce the new board will be $735,000 per year, and fixed costs are $3,375,000 per year. If the tax rate is 24 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

Given:
New Board Selling Price	$25,200
New Board Sale Quantity	1690 per year
Current Sales	2040 per year
If new model is introduced sales quantity	1710 per year
Old board Selling Price	$23,600
Variable cost	58% of sales
Depreciation on new board	$735,000
Fixed Cost	$3,375,000
Tax rate	24%
If the New Board project is undertaken there would sale of New Board , wherease the new board
project would bring a loss of revenure for the old board , as old board sale would reduce to 1710 model
per year instead of 2040 model before implementation of new board project.
Revenue = Sales value of New board - Sale value lost on account of introduction of New board
Sales value of New board = New Board sale Quantity *S.P.per new board
$25200*1690
Sale value of new board = $42588000
Sale value lost on account of introduction of New board = Current Sale Quantity before introduction of new board - Sale Quantity after introduction of new board *
		Old board Selling price
		(2040-1710)*$23600
		Sale value lost on account of new board project =$7788000
Operating cash flow is Net cash income i.e Net income +Depreciation
Calculation of OCF:
Sales Revenue	$34,800,000	(Sale value of New board Project - Sale value lost on account of new board project i.e $42588000-$7788000)
Less:Variable cost	($20,184,000)	(58% of Sales revenue)
Less:Fixed Costs	($3,375,000)
Less:Depreciation	($735,000)
EBIT	$10,506,000
Less: Taxes @ 24%	($2,521,440)
Net operating Profit after tax	$7,984,560
Add:Depreciation	$735,000
Operating cash flow (OCF)	$8,719,560