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Question 8 (10 points) Rolston Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $25,000, and the company expects to sell 1,700 per year. The company currently sells 2,000 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,500 units per year. The old board retails for $24,000. Variable costs are 60 percent of sales, depreciation on the equipment to produce the new board will be $2,000,000 per year, and fixed costs are $3,500,000 per year. If the tax rate is 38 percent, what is the annual OCF for the project? $6,000,000 O $6,154,000 $5,004,000 O $3,154,000

Answer 1

Calculation annual operating cash flow of the project is shown below
Sale revenue from new board	$42,500,000	1700*25000
Less: Loss of sale of existing board	$12,000,000	(2000-1500)*24000
Sales revenue	$30,500,000
Less: Variable costs	$18,300,000	30500000*60%
Less: Fixed costs	$3,500,000
Less: Depreciation	$2,000,000
Income before taxes	$6,700,000
Less: Taxes @ 38%	$2,546,000
Net income	$4,154,000
Add: Depreciation	$2,000,000
Operating cash flow	$6,154,000
Thus, annual operating cash flow is $6,154,000