McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for 777 per set...


McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $777 per set and have a variable cost of $384 per set. The company has spent $199,456 for a marketing study that determined the company will sell 55,506 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,281 sets of its high-priced clubs. The high-priced clubs sell at $1,059 and have variable costs of $652. The company will also increase sales of its cheap clubs by 10,086 sets. The cheap clubs sell for $469 and have variable costs of $225 per set. The fixed costs each year will be $9,200,875. The company has also spent $1,126,219 on research and development for the new clubs. The plant and equipment required will cost $28,686,583 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,251,655 that will be returned at the end of the project. The tax rate is 31 percent, and the cost of capital is 8 percent. What is the annual OCF for this project?

Operating Cash Flow:

Operating cash flow refers to a measure that focuses on the cash that is generated with the help of the normal operating activities of the business. It helps in determining whether the organization is capable of maintaining the operations of the business or not.

Answer and Explanation:

Calculating the annual operating cash flow:

Particulars Amount ($)
Sales from new line of Golf club (777 * 55,506) 4,31,28,162
Variable cost for new line ( 384 * 55,506) -21314304
Lost sales of 9,281 sets of its high priced clubs (1,059 - 652) * 9,281) -3777367
Increase in the sales of the cheap clubs by 10,086 sets (469 - 225) * 10,086 24,60,984
Fixed cost -9200875
Depreciation per annum (28686583 / 7) -4098083
Profit before tax 71,98,517
tax 31% -2231540
Profit after tax 49,66,977
add: depreciation being the non cash expense 40,98,083
Annual operating cash flow 90,65,060

Learn more about this topic:

Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4

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