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 S25.900. 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 S21,800. Variable costs are 53 percent of sales, depreciation on the equipment to produce the new board will be S1.390.000 per year, and fixed costs are S1.290.000 per year. Required: If the tax rate is 30 percent, what is the annual OCF for the project?

Explanation / Answer

ANS;

sales of new = 1580*27,300 = 43134000

lost sale of old = -23200*(2080-1900) = -4176000

variable cost = .54*(43134000-4176000) = 21037320

FC = 1430000

depreciation = 1530000

EBIT = 43134000-4176000-21037320-1430000-1530000 = $14960680

Tax = .34*14960680 = 5086631.2

Net income = 14960680-5086631.2 = $9874048.8

OCF = net income+depreciation = 9874048.8+1530000 = $11404048.8

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