Rolston Music Company is considering the sale of a new sound board used in recor
ID: 2725297 • Letter: R
Question
Rolston Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,500, and the company expects to sell 1,500 per year. The company currently sells 2,000 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,820 units per year. The old board retails for $22,400. Variable costs are 55 percent of sales, depreciation on the equipment to produce the new board will be $1,450,000 per year, and fixed costs are $1,350,000 per year. Required: If the tax rate is 38 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
New sound board
Revenue
39750000
(-) variable cost 55%
-21862500
(-) Fixed cost
-1350000
(-) Depreciation
-1450000
EBIT
15087500
(-) Tax 38%
-5733250
Net Income
9354250
Reduction in the sale of old board = 22,400 x (200-1820)
= 4,032,000
After tax contribution from old board = 4032000x (1-0.55) x (1-0.38)
=1124928
Operating cash flow = new income from new board – lost contribution old sale + Depreciation
= 9,354,250 – 1,124,928 +1450000
= 11929178
Revenue
39750000
(-) variable cost 55%
-21862500
(-) Fixed cost
-1350000
(-) Depreciation
-1450000
EBIT
15087500
(-) Tax 38%
-5733250
Net Income
9354250
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