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 26,000; the price is $21,000 per car. Variable costs of production are $11,000 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 9,000 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 $49,000 per year. The marginal tax rate is 40 percent. What is the incremental annual cash flow from operations?

Answer 1

Assuming the fixed cost remains same for
both the cases and will not impact cash flow:
Details	Amt :
Annual Contribution receivable from Hydrid car sale=26000*(21000-11000)=	$                 260,000,000
Less: Annual Contribution loss on Sedan sale=9000*(20000-12000)=	$                 (72,000,000)
Less: Annual Plant Depreciation	$                         (49,000)
Net Incremental EBIT	$                 187,951,000
Less Tax 40%	$                 (75,180,400)
After Tax Annual Incremental EBIT	$                 112,770,600
Add Back Zdepreciation	$                           49,000
Net Incremental Annual cash flow =	$                 112,819,600