Meld Music Company is considering the sale of a new sound board used in recordin
ID: 3231111 • Letter: M
Question
Meld Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $27,248, and the company expects to sell 1,524 units per year. The company currently sells 2,074 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,871 units per year. The old board retails for $27,709. Variable costs are 46 percent of sales, depreciation on the equipment to produce the new board will be $1.23 million per year, and fixed costs are $1.26 million per year. If the tax rate is 38 percent, what is the annual OCF for the project?
Explanation / Answer
Solution:
sales of new = 1524*27,248 = 41525952
lost sale of old = -27,709*(1,524-1,871) = 9615023
variable cost = 0.46*(41525952-9615023) = 14679027.3
FC = 1260000
depreciation = 1230000
EBIT = 41525952-9615023-14679027.3-1260000-1230000 = $14741901.7
Tax = 0.38*14741901.7 = 5601922.65
Net income = 14741901.7-5601922.65 = $9139979.05
OCF = net income+depreciation = 9139979.05+1230000 = $10369979.1