Question

ABC Computer, Inc. wants to develop and sell a new kind of computer. This new computer is estimated to have a customer selling price of $25,100. ABC thinks they can find customers to buy 1,680 per year of this new computer. ABC now sells 2,030 units of its current computer model per year. If the new computer is introduced, sales of the current computer model will decline to 1,700 units annually. The current computer model sells for $23,500. Variable costs for both the old and new computer models are 57 percent of sales.   ABC will need to buy equipment to produce the new computer and this will create an annual amount of depreciation of $795,000. In addition, there will be annual fixed costs of $3,350,000 related to the new computer. ABC has a tax rate of 23 percent. Calculate the amount of the annual operating cash flow for the new computer.

Answer 1

Calculation of Annual operating Cash flow

	Particulars	Amount($)
	Sales Revenue($25,100* 1,680)	42168,000
Less:	Variable cost @ 57% of $42168,000	24035,760
Less:	Annual fixed cost	3350,000
Less:	Depreciation	795,000
	Operating Income before Tax	13987,240
Less:	Tax @23%	3217,065
	Operating income after tax	10770,175
Add:	Non cash expenses(Depreciation)	795,000
	Annual operating Cash flow	11565,175
	Adjustment for Decline in cash flow on sale of old computer
Less:	Decline in sale revenue [(2030-1700)*$23500]	7755,000
Add:	Saving in cost (7755,000*57%)	4420,350
Add:	Saving in Tax(7755,000-4420,350)*23%	766,970
Annual operating Cash flow for the new computer	8997,495

Thus annual operating Cash flow for the new computer is $8,997,495.