Question

ABC Computer, Inc. wants to develop and sell a new kind of computer. This new computer is estimated to have a customer selling price of $24,900. ABC thinks they can find customers to buy 1,660 per year of this new computer. ABC now sells 2,010 units of its current computer model per year. If the new computer is introduced, sales of the current computer model will decline to 1,680 units annually. The current computer model sells for $23,300. Variable costs for both the old and new computer models are 55 percent of sales.   ABC will need to buy equipment to produce the new computer and this will create an annual amount of depreciation of $915,000. In addition, there will be annual fixed costs of $3,300,000 related to the new computer. ABC has a tax rate of 21 percent. Calculate the amount of the annual operating cash flow for the new computer.

Answer 1

Answer : Projects Operating Cash Flow is $ 9,545,947.50

Calculation of Amount of the Annual Operating Cash Flows

Below is the Table showing the calculation of Operating Cash Flow :

Particulars	Quantity	Price	Workings	Total
Revenue from Sale of New Computer	1,660	24,900	1,660 * 24,900	41,334,000
Revenue Lost of Old Computer	330 (2,010 - 1,680)	23,300	330 * 23,300	(7,689,000)
Additional Variable Cost of New Computer	1660	24,900*55% = 13,695	55 % of Sales	(22,733,700)
Saving in Variable Cost of old computer due to fewer sale	330	23300 * 55% = 12,815	55 % of Sales	4,228,950
Additional Depreciation Expense				(915,000)
Additional Fixed Expenses				(3,300,000)
Earnings Before Tax				10,925,250
Tax @ 21 %			10,925,250 * 21%	(2,294,302.5)
Earnings After Tax				8,630,947.50
Depreciation (being Non cash Item)				915,000
Project's Operating Cash Flows				9,545,947.50

Therefore Projects Operating Cash Flow is $ 9,545,947.50.

Note : When calculating Projects Operating Cash Flows we will consider additional revenue/ (Lost Revenue) as well as (additonal cost) /Saving in cost due to addition of one more product i.e New Computer in this case.