Problem 9-8 Calculating Project OCF [LO 2] Herrera Music Company is considering

Question

Problem 9-8 Calculating Project OCF [LO 2]

Herrera Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,200, and the company expects to sell 1,470 per year. The company currently sells 1,970 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,790 units per year. The old board retails for $22,100. Variable costs are 57 percent of sales, depreciation on the equipment to produce the new board will be $1,420,000 per year, and fixed costs are $1,320,000 per year.

If the tax rate is 35 percent, what is the annual OCF for the project? (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount (e.g., 1,234,567).)

Herrera Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,200, and the company expects to sell 1,470 per year. The company currently sells 1,970 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,790 units per year. The old board retails for $22,100. Variable costs are 57 percent of sales, depreciation on the equipment to produce the new board will be $1,420,000 per year, and fixed costs are $1,320,000 per year.

Explanation / Answer

OCF = EBIT + Depriciation -taxes

sale of new = 1470 * 26200 = 38514000

loss of sales on old = 22100 * (1970-1790) = 3978000

variable costs = 19685520

EBIT = 38514000 - 3978000-19685520 - 1320000-1420000 =12110480

Tax = 12110480 * 0.35 = 4238668

OCF = 12110480+ 1420000 - 4238668 = 9291812

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