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 $27,100, and the company expects to sell 1,560 per year. The company currently sells 2,060 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,880 units per year. The old board retails for $23,000. Variable costs are 56 percent of sales, depreciation on the equipment to produce the new board will be $1,510,000 per year, and fixed costs are $1,410,000 per year. Required: If the tax rate is 40 percent, what is the annual OCF for the project?

Explanation / Answer

Rolston Music Company As the question is OCF of the projcet, not the incremental cash flow, the effect of old board sales loss not   considered in calculation. Details Amt $per unit Total Amt $ Units sold in year           1,560.00 Sales Revenue         27,100.00      42,276,000 Variable cost         15,176.00      23,674,560 Contribution Margin         11,924.00      18,601,440 Less Depreciation /year        1,510,000 Less Fixed cost /year        1,410,000 Total Fixed cost        2,920,000 Income before Tax      15,681,440 Less Tax @40%        6,272,576 Post Tax Income        9,408,864 Add back depreciation        1,510,000 OCF per year      10,918,864

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