Herrera Music Company is considering the sale of a new sound board used in recor
ID: 2644821 • Letter: H
Question
Herrera Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,700, and the company expects to sell 1,520 per year. The company currently sells 2,020 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,840 units per year. The old board retails for $22,600. Variable costs are 57 percent of sales, depreciation on the equipment to produce the new board will be $1,470,000 per year, and fixed costs are $1,370,000 per year. Required: If the tax rate is 35 percent, what is the annual OCF for the project? (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount (e.g., 1,234,567).) OCF= $__________?
Explanation / Answer
Sale of New Boards = 40584000 (26700*1520)
Sales of Existing Models = 41584000 (22600*1840)
Total Sales = 82168000
Less Variable Cost (57%) = -46835760
Contribution = 35332240
Less Fixed Cost = - 1370000
Profit before Dep. = 33962240
Less Dep. = - 1470000
PBT = 32492240
Less Tax (35%) = -11372284
PAT = 21119956
Add Dep. = 1470000
Cash Inflow = 22589956
So Cash Inflow- $ 22589956