6. Rolston Music Company is considering the sale of a new sound board used in re

Question

6. 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? (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)

OCF $

Explanation / Answer

Sales of new board = 1,440 x 25,900 = 37,296,000

Cost of new board = 53% x 37,296,000 = 19,766,880

Cannibalization of old board = (1,940 - 1,760) x 21,800 x (1 - 53%) = 1,844,280

EBT = Sales - Costs - Cannibalization - Depreciation - FC

= 37,296,000 - 19,766,880 - 1,844,280 - 1,390,000 - 1,290,000

= 13,004,840

Net Income = EBT x (1 - tax rate)

= 13,004,840 x (1 - 30%)

= 9,103,388

OCF = Net Income + Depreciation = 9,103,388 + 1,390,000 = $10,493,388

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.