Question

??Huffman Systems has forecasted sales for its new home alarm systems to be 65,000 units per year at $39.00 per unit. The cost to produce each unit is expected to be about 41?% of the sales price. The new product will have an additional 450,000 of fixed costs each? year, and the manufacturing equipment will have an initial cost of $3,100,000 and will be depreciated over eight years? (straight line). The company tax rate is 35?%.

What is the annual operating cash flow for the alarm systems if the projected sales and price per unit are constant over the next eight? years? What is the annual operating cash flow for the alarm? systems?

Answer 1

Initial Investment = $3,100,000
Useful Life = 8 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $3,100,000 / 8
Annual Depreciation = $387,500

Unit Sales = 65,000
Selling Price per unit = $39.00

Sales Revenue = Unit Sales * Selling Price per unit
Sales Revenue = 65,000 * $39.00
Sales Revenue = $2,535,000

Variable Costs = 41% * Sales Revenue
Variable Costs = 41% * $2,535,000
Variable Costs = $1,039,350

Fixed Costs = $450,000

Annual OCF = [Sales Revenue - Variable Costs - Fixed Costs]*(1 - tax) + tax*Depreciation
Annual OCF = [$2,535,000 - $1,039,350 - $450,000]*(1 - 0.35) + 0.35 * $387,500
Annual OCF = $1,045,650 * 0.65 + 0.35 * $387,500
Annual OCF = $815,297.50

So, annual operating cash flows for alarm system is $815,297.50