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 $26,300, and the company expects to sell 1,480 per year. The company currently sells 1,980 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,800 units per year. The old board retails for $22,200. Variable costs are 54 percent of sales, depreciation on the equipment to produce the new board will be $1,430,000 per year, and fixed costs are $1,330,000 per year. Required: If the tax rate is 34 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

OCF is operating cash flow, in other words it is the cash flow from operations

so OCF = (Revenue - Costs) * (1-tax)

Revenue = 1480 * 26300 + 1800 * 22200 = 78,884,000

Costs = Variable costs + fixed costs = 78,884,000 * 54% + 1,330,000 = 43,927,360

OCF = (78,884,000-43,927,360) * (1-34%) = $23,071,382.40.

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