Rolston Music Company is considering the sale of a new sound board used in recor
ID: 2761362 • Letter: R
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 retail 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. If the tax rate is 40 percent, what is the annual OCF for the project?
Explanation / Answer
Answer:
Calculation of Annual Net Cash Flows:
Annual Cash Inflows = Expected Sale of New Board + Revised Expected Sale of Old Board = 27,100 x 1,560 + 23,000 x 1,880 = $ 85,516,000
Annual Cash Outflows = Variable Costs + Fixed Costs + Tax = 56% of $ 85,516,000 + $ 1,410,000 + 40% of {44% of $ 85,516,000(Contribution) - $ 1,410,000 (Fixed Cost) - $ 1,510,000 (Depreciation)} = $ 47,888,960 + $ 1,410,000 + $ 13,882,816 = $ 63,181,776
Annual loss of contribution from sale of (2060 - 1880) units of Old Model = 44% of 23,000 x 180 = $ 1,821,600
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