Huffman Systems has forecasted sales for its new home alarm systems to be 64,000

Question

Huffman Systems has forecasted sales for its new home alarm systems to be 64,000 units per year at $38.50 per unit. The cost to produce each unit is expected to be about 42% of the sales price. The new product will have an additional $480,000 fixed costs each year, and the manufacturing equipment will have an initial cost of $2,410,000 and will be depreciated over eight years (straight-line). The company tax rate is 40%. 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? Should Huffman Systems add the new home alarm system to its set of products? The manufacturing equipment will be sold off a the end of the eight years for $210,000, and the cost of capital for this project is 12%.

Explanation / Answer

Hi,

Please find the answer as follows;

NPV = -2410000 + 689972/(1+.12)^1 + 689972/(1+.12)^2 + 689972/(1+.12)^3 + 689972/(1+.12)^4 + 689972/(1+.12)^5 + 689972/(1+.12)^6 + 689972/(1+.12)^7 + 689972/(1+.12)^8 + 210000*(1-.40)/(1+.12)^8 = 1068421.63 or 1068422

Yes, Huffman should add the new home alarm system to its set of products as it offers a + NPV.

Thanks.

Sales 2464000 Less Variable Costs 1034880 Less Fixed Costs 480000 Less Depreciation 301250 Net Income Before Taxes 647870 Tax 259148 Net Income After Tax 388722 Add Depreciation 301250 Annual Operating Cash Flow 689972

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