Question

Given the soaring price of gasoline, Ford is considering introducing a new production line of gas-electric hybrid sedans. The expected annual unit sales of the hybrid cars is 36,000; the price is $22,000 per car. Variable costs of production are $12,000 per car. The fixed overhead including salary of top executives is $80 million per year. However, the introduction of the hybrid sedan will decrease Ford’s sales of regular sedans by 12,000 cars per year; the regular sedans have a unit price of $20,000, a unit variable cost of $12,000, and fixed costs of $250,000 per year. Depreciation costs of the production plant are $50,000 per year. The marginal tax rate is 40 percent. What is the incremental annual cash flow from operations?

Answer 1

The incremental annual cash flow from operations

Contribution from hybrid cars	(22000-12000)*36,000	$360,000,000
Contribution lost from regular sedan	(20,000-12,000)*12000	-96,000,000
Less: Depreciation		-50000
EBIT		263,950,000
Net operating profit after tax	(1-0.4)	158,370,000
Add : depreciation		50,000

Incremental annual cash flow 158,420,000