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 $27,000, and the company expects to sell 1,550 per year. The company currently sells 2,050 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,870 units per year. The old board retails for $22,900. Variable costs are 55 percent of sales, depreciation on the equipment to produce the new board will be $1,500,000 per year, and fixed costs are $1,400,000 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 (e.g., 1,234,567).)

Explanation / Answer

The Annual OCF for the project is $ 10,228,112

The workings are given in the statement below:

New Board Existing Model Incremental Sales (units) 1550 -180 Sales Price per Unit ($) 27,000 22,900 Contribution per Unit ($) (45% of Sales) 12150 10305 Total Contribution ($) 18832500 -1854900 16977600 Less: Fixed Cost ($) 1400000 Less: Depreciation ($) 1500000 PROFIT BEFORE TAX 14077600 Less: Tax @ 38% 5349488 PROFIT AFTER TAX 8728112 Add Depreciation 1500000 ANNUAL OCF ($) 10228112

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