Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $24,400, and the company expects to sell 1,610 per year. The company currently sells 1,960 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,630 units per year. The old board retails for $22,800. Variable costs are 56 percent of sales, depreciation on the equipment to produce the new board will be $1,215,000 per year, and fixed costs are $3,175,000 per year. If the tax rate is 21 percent, what is the annual OCF for the project?

Operating cash flow $8,786,676

Explanation:

The computation of the operating cash flow is shown below:

The Price of a new Board  is $24,400

Multiplied it by Expected No.of units sold is 1,610

Expected revenue$39,284,000

Less: Variable cost (56% of sales ) = ($21,999,040)

Contribution earned on new product= $17,284,960

Less: Fall in current Contribution= (3,310,560)

(196 0 -1630) × ($22,800 × 44%)

Net increment in revenue= $13,974,400

Less: Fixed cost= ($3,175,000)

Less:  Depreciation = ($1,215,000)

Net Income before tax= $9,584,400

Less: Tax (21%) = ($2,012,724)

Net income after tax = $7,571,676

Add;: Depreciation $1,215,000

Operating cash flow $8,786,676

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