Santo Automotive is considering producing a new automobile product, No Text, which disengages the ability to text while driving.Marketing data indicate that the company will be able to sell 40,000 units per year at $16 each.The product will be produced in a section of an existing factory that is currently not in use.To produce No Text, Santo must buy a machine that costs $820,000.The machine has an expected life of five years and will have an ending residual value of $50,000.Santo will depreciate the machine over five years using the straight-line method.In addition to the cost of the machine, the company will incur incremental annual manufacturing costs of $390,000.The income tax rate is 30% and the company's required rate of return is 10%.How much is net operating cash flow each year?

Question

Quizplus · Accepted Answer

Net operating cash flow can be calculated by first determining the annual operating income and then adjusting for non-cash expenses and taxes. Here's the breakdown:1. **Revenue**: 40,000 units * $16/unit = $640,0002. **Annual Depreciation**: ($820,000 - $50,000) / 5 years = $154,0003. **Incremental Annual Manufacturing Costs**: $390,0004. **Operating Income Before Taxes**: Revenue - Depreciation - Manufacturing Costs = $640,000 - $154,000 - $390,000 = $96,0005. **Taxes (30%)**: $96,000 * 30% = $28,8006. **Operating Income After Taxes**: $96,000 - $28,800 = $67,2007. **Net Operating Cash Flow**: Operating Income After Taxes + Depreciation = $67,200 + $154,000 = $221,200Therefore, the net operating cash flow each year is $221,200.

Santo Automotive Is Considering Producing a New Automobile Product, No