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 $24,600. ABC thinks they can find customers to buy 1,630 per year of this new computer. ABC now sells 1,980 units of its current computer model per year. If the new computer is introduced, sales of the current computer model will decline to 1,650 units annually. The current computer model sells for $23,000. Variable costs for both the old and new computer models are 52 percent of sales. ABC will need to buy equipment to produce the new computer and this will create an annual amount of depreciation of $1,095,000. In addition, there will be annual fixed costs of $3,225,000 related to the new computer. ABC has a tax rate of 23 percent. Calculate the amount of the annual operating cash flow for the new computer. (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.

Answer 1

Answer

Annual Sales Units of New Computer (A) (Units)	1630
Selling Price of New Computer (B)	24600
Total Sales (C= B x A)	40098000
Variable Cost (D= 52% of C)	20850960
Contribution (E= C-D)	19247040
Less :- Depriciation (F)	1095000
Less:- Fixed Costs (G)	3225000
PBT (H= E-F-G)	14927040
Tax (I = H x 23%)	3433219.2
PAT (J = H - I)	11493821

Therefore we have PAT of $ 11393821.

To get to our Operating Cash Flow we need to add Depriciation and Deduct the Loss of Profit beacuse of less sale of current computer model.

Let us understand the loss of Profit of old computer model

Sales of Old Computer Before the Launch of New Model (A)	1980	Units
Sales of Old Computer After the Launch of New Model (B)	1650	Units
Loss of Sales Units (C=A-B)	330
Sales Price Per Units (D)	23000
Total Sales Value (E= C x D)	7590000
Variable Cost (F = E x 52 %)	3946800
Contribution (G = E -F)	3643200
Tax (H = G* 23%)	837936
Cash Flow Loss becasue of New Model (I = G - H)	2805264

Now Operating annual Cash flow of the new computer = $ 11493821 + $ 1095000 - $ 2805264 = $ 9783557