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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?

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Answer:

the annual Operating Cash Flow (OCF) for the project (new board only) is $18,433,121

Explanation:

Sales = sale of new board  = $24,600 x 1,630 = $40,098,000

Expenses = variable cost + fix cost  - loss of current sales = 52% x $40,098,000 + $3,225,000 - $23,000 x (1,980-1,650) = $16,485,960

EBIT = Sales - expenses  - depreciation

= $40,098,000-$16,485,960-$1,095,000 = $22,517,040

OCF = EBIT - tax paid + depreciation

=$22,517,040 - 23%x$22,517,040+$1,095,000 = $18,433,121

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