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?

1. Incremental annual cash flow from operations?

Answer 1

Expected contribution from hybrid cars	(26000*(21000-11000))	260,000,000
Less:Contribution lost from regular cars	(9000*(20,000-12,000))	-72,000,000
Add: Saving fixed cost of regular cars		250,000
Less: Fixed overhead costs of hybrid cars	-80,000,000
Incremental net income		108,250,000
Taxes	(108,250,000*40%)	-43,300,000
Incremental cash flows		151,550,000

No change in depreciation on plants so, it can be ignore.