Question

acme, inc. produces anvils. the company is considering buying a $89,750 piece of equipment that will increase annual sales from 17,300 units to 21,450 units. the equipment would be depreciated straight-line to zero over the 7-year life of the project. at that point, the equipment will be worthless. the company faces annual fixed costs of $17,500. anvils cost $76 per unit to produce, and can be sold for $88. if the tax rate is 21 percent, what is the operating cash flow for this project?

Answer 1

The operating cash flow for this project is $39,120.

Step-by-step explanation:

To calculate the operating cash flow for this project, we need to calculate the incremental revenues and costs associated with the purchase of the equipment.

The increase in annual sales from 17,300 units to 21,450 units represents an increase of 4,150 units.

To calculate the incremental revenues, we multiply the increase in units by the selling price: 4,150 units * $88 = $364,400.

Next, we calculate the incremental costs. The cost per unit to produce the anvils is given as $76, so the incremental cost per unit is $76.

The increase in units is 4,150, so the total incremental cost is 4,150 units * $76 = $315,400.

The operating cash flow is calculated by subtracting the incremental costs from the incremental revenues and applying the tax rate.

In this case, the operating cash flow is ($364,400 - $315,400) * (1 - 0.21) = $39,120.