Question

# ABC Computer, Inc. wants to develop and sell a new kind of computer. This new computer...

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.

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.

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