Rolston Music Company is considering the sale of a new sound board used in recor

Question

Rolston 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 $22,300. Variable costs are 55 percent of sales, depreciation on the equipment to produce the new board will be $1,975,000 per year, and fixed costs are $2,400,000 per year.

If the tax rate is 38 percent, what is the annual OCF for the project?

If the tax rate is 38 percent, what is the annual OCF for the project?

Explanation / Answer

Annual OCF for the project = ((New board sale price *no of unit sold - Old Board sale price * no of unit lost)*(1-Variable costs%) - fixed costs)*(1-tax rate) + Annual Depreciation*tax rate

Annual OCF for the project = ((26400*1500 - 22300*(1850-1520))*(1-55%) - 2400000)*(1-38%) + 1975000*38%

Annual OCF for the project = $ 8,257,739

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