Meld Music Company is considering the sale of a new sound board used in recordin

Question

Meld Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $32,882, and the company expects to sell 1,587 units per year. The company currently sells 2,050 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,850 units per year. The old board retails for $27,970. Variable costs are 44 percent of sales, depreciation on the equipment to produce the new board will be $1.17 million per year, and fixed costs are $1.2 million per year. If the tax rate is 31 percent, what is the annual OCF for the project?

Explanation / Answer

COnt per New Borad = 32,882*(1-44%) = $18,414 SO Total COnt from New Board = 1587* $18,414 = $29,223,018 ....(a) Cont of Old Board = 27970*(1-44%) = $15,663 Total Cont from Old board = 1850* $15,663 = $28,976,550 ...(b) SO Total Cont = a+b = $58,199,568 Less Dep 1,170,000 Less FC 1,200,000 ----------------------- PBT $55,829,568 Less Tax 31% $(17,307,166) ------------------------------- PAT $38,522,402 Add Back Dep 1170,000 ----------------------- OCF $39,692,402

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