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 $25,900, and the company expects to sell 1,440 per year. The company currently sells 1,940 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,760 units per year. The old board retails for $21,800. Variable costs are 53 percent of sales, depreciation on the equipment to produce the new board will be $1,390,000 per year, and fixed costs are $1,290,000 per year.

If the tax rate is 30 percent, what is the annual OCF for the project?

Explanation / Answer

Sales revenue of the new board = $25900 * 1440= $37,296,000

Contribution of the new board = $37,296,000 * 47% = $17,529,120

Income before tax = $17,529,120 - $1,390,000 (depreciation) - $1,290,000 (fixed costs) = $14,849,120

After tax income = $14,849,120 * (1 - 0.30) = $10,394,384

the annual OCF for the project = $10,394,384 + $1,390,000 (depreciation) = $11,784,384

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