Question

Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,400, and the company expects to sell 1,500 per year. The company currently sells 1,850 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,520 units per year. The old board retails for $24,900. Variable costs are 55 percent of sales, depreciation on the equipment to produce the new board will be $1.875 million per year, and fixed costs are $2.9 million per year. If the tax rate is 22 percent, what is the annual OCF for the project? (Do not round intermediate calculations and round your answer to the nearest whole dollar amount. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

Answer 1

Answer:

The correct answer is = $64,409,960

However, if we assume there are no Differed Tax, the answer will be

$47,371, 400

Explanation:

OCF stands for Operating Cash Flow.

The basic formula for Operation Cash Flow is =

Net Income + Non-Cash Expenses - Increase in working capital

Net Income:

Old Boards = 1,520 x 24,900 = $37,848,000

New Boards = 1500 x 26,400 = $39,600,000

Total Income = $77,448,000

Non-Cash Expenses:

Depreciation = 1.875 million + 2.9 million = $4,775,000

(Assumption) Differed income tax = 22% of Sales  = $17,038,560

Total Non-Cash Expense = $21,813,560

Increase in working Capital:

45% of Sales

i.e. $34,851,600

Hence:

77,448,000 + 21,81 3,560- 34,851,600

= $64,409,960