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 $25,900, and the company expects to sell 1.440 per year. The company currently sells 1.940 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1.760 units per year. The old board retails for $21,800. Variable costs are 53 percent of sales, depreciation on the equipment to produce the new board will be $1,390,000 per year, and fixed costs are $1,290,000 per year. If the tax rate is 30 percent, what is the annual OCF for the project? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount (e.g., 1.234,567).)

Explanation / Answer

The annual operating cash flow is $ 24,407,456 Ans

Workings: Revenues from old board 1760 x 21,800 38,368,000

Revenues from new board 1440 x 25,900 37,296,000

Total revenues therefore $ 75,664,000

Projected Income Statement

Depreciation has been added back after charging tax as it is a non cash expense.

$ $ Sales 75,664,000 Less variable cost @ 53 % 40,101,920 Gross margin 35,562,080 Less fixed operating cost 1,290,000 EBIDTA 34,272,080 Less depreciation on equipment 1,390,000 EBIT 32,882,080 Interest expense NIL Less tax @ 30% 9,864,624 Earnings after tax 23,017,456 Add depreciation 1,390,000 Operating cash flow 24,407,456

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