Winnebagel Corp. currently sells 30,000 motor homes per year at $68,000 each, and 12,000 luxury motor coaches per year at $105,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 25,000 of these campers per year at $14,000 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 2,400 units per year, and reduce the sales of its motor coaches by 1,100 units per year. What is the amount to use as the annual sales figure when evaluating this project? Sales due solely to the new product line are: |

25,000($14,000) = $350,000,000 |

Increased sales of the motor home line occur because of the new product line introduction; thus: |

2,400($68,000) = $163,200,000 |

in new sales is relevant. Erosion of luxury motor coach sales is also due to the new campers; thus: |

1,100($105,000) = $115,500,000 loss in sales |

is relevant. The net sales figure to use in evaluating the new line is thus: |

$350,000,000 + 163,200,000 − 115,500,000 = $397,700,000 |

Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,080,000 in annual sales, with costs of $775,000. If the tax rate is 35 percent, what is the OCF for this project?

Using the tax shield approach to calculating OCF (Remember the approach is irrelevant; the final answer will be the same no matter which of the four methods you use.), we get: |

OCF = (Sales − Costs)(1 − T) + T(Depreciation) | OCF = ($2,080,000 − 775,000)(1 − 0.35) + 0.35($2,700,000/3) | OCF = $1,163,250 |