Rolston Music Company is considering the sale of a new sound board used in recor
ID: 2738474 • 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 $26,100, and the company expects to sell 1,460 per year. The company currently sells 1,960 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,780 units per year. The old board retails for $22,000. Variable costs are 56 percent of sales, depreciation on the equipment to produce the new board will be $1,410,000 per year, and fixed costs are $1,310,000 per year.
Required:
If the tax rate is 40 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).)
OCF
$
Rolston Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,100, and the company expects to sell 1,460 per year. The company currently sells 1,960 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,780 units per year. The old board retails for $22,000. Variable costs are 56 percent of sales, depreciation on the equipment to produce the new board will be $1,410,000 per year, and fixed costs are $1,310,000 per year.
Explanation / Answer
Sales of new = 1460*26100 = 38,106,000
Lost sale of old = -22000*(1960-1780) = -3,960,000
Variable cost = .56*(38,106,000-3,960,000) = 19,121,760
FC = 1310000
Depreciation = 1,410,000
EBIT = 38,106,000-3,960,000-19,121,760-1,310,000-1,410,000 = $12,304,240
Tax = 0.40*12,304,204 = 4,921,696
Net income = 12,304,240-4,921,696 = $7,382,544
OCF = net income+ depreciation = 7,382,544+1,410,000 = $8,792,544
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