Question

A company is considering the sale of a new sound board used in recording studios. The new board would sell for $24,900, and the company expects to sell 1,660 per year. The company currently sells 2,010 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,680 units per year. The old board retails for $23,300. Variable costs are 55 percent of sales, depreciation on the equipment to produce the new board will be $915,000 per year, and fixed costs are $3,300,000 per year. If the tax rate is 21 percent, what is the annual OCF for the project?

Answer 1

Sale of new boards = 24900 * 1660 = 41334000

Variable costs of new boards = 55 % * 41334000 =  22733700

Cash flow from new boards = (Sales - Variable costs - fixed costs - depreciation) * (1 - tax rate) + depreciation

= (41334000 - 22733700 - 3300000 - 915000) * (1 - 21%) + 915000

= 12279387

Opportunity loss from existing boards needs to be reduced to arrive at final cash flow.

Loss in sale of boards = 2010 - 1680 = 330 boards

Cash flow lost = (Sale of 330 boards - variable cost of 330 boards) * ( 1 - tax rate)

= (330 * 23300 - 330 *23300 *55%) * (1 - 21%)

= 2733439.50

Annual OCF = 12279387 - 2733439.50

= 9545947.50