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 $26,500, 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

Explanation / Answer

1.The total revenue after opportunity cost of old boards are as follows

Revenue for new boards = 1500* 26500 = 39,750,000

Opportunity loss of old board = 2000 -1820 = 180 Boards

So total loss = 180* 22400 = 4,032,000

Hence Final revenue = 39,750,000 - 4,032,000 = 35,718,000

2. The variable costs is 55% of sales = 0.55* 35,718,000 = 19,644,900

Using these information, the below table is calculated:

Operating Cash flow = $9,679,322.00

Revenues 35718000 Variable Costs 19644900 Fixed Costs 1350000 Depreciation 1450000 Profit before tax 13273100 Tax at 38% 5043778 Profit after tax 8229322 Add back depreciation 1450000 Operating Cash flow (OCF) 9679322

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