6:04IMG_0741.jpgXGiven the soaring price of gasoline, Ford is considering introducing a new production line of gas-electric hybrid sedans. The expected annual unit sales of the hybrid cars is 25,000; the priceis $21.000 per car. Variable costs of production are $9,000 per car. The fixed overhead including salary of top executives is $80 million per year. However, the introduction of the hybridsedan will decrease Ford's sales of regular sedans by 12,000 cars per year; the regular sedans have a unit price of $20,000, a unit variable cost of $12.000, and fixed costs of $250,000 peryear. Depreciation costs of the production plant are $45,000 per year. The marginal tax rate is 40 percent. What is the incremental annual cash flow from operations?

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Asked Oct 20, 2019
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6:04
IMG_0741.jpg
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Given the soaring price of gasoline, Ford is considering introducing a new production line of gas-electric hybrid sedans. The expected annual unit sales of the hybrid cars is 25,000; the price
is $21.000 per car. Variable costs of production are $9,000 per car. The fixed overhead including salary of top executives is $80 million per year. However, the introduction of the hybrid
sedan will decrease Ford's sales of regular sedans by 12,000 cars per year; the regular sedans have a unit price of $20,000, a unit variable cost of $12.000, and fixed costs of $250,000 per
year. Depreciation costs of the production plant are $45,000 per year. The marginal tax rate is 40 percent. What is the incremental annual cash flow from operations?
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6:04 IMG_0741.jpg X Given the soaring price of gasoline, Ford is considering introducing a new production line of gas-electric hybrid sedans. The expected annual unit sales of the hybrid cars is 25,000; the price is $21.000 per car. Variable costs of production are $9,000 per car. The fixed overhead including salary of top executives is $80 million per year. However, the introduction of the hybrid sedan will decrease Ford's sales of regular sedans by 12,000 cars per year; the regular sedans have a unit price of $20,000, a unit variable cost of $12.000, and fixed costs of $250,000 per year. Depreciation costs of the production plant are $45,000 per year. The marginal tax rate is 40 percent. What is the incremental annual cash flow from operations?

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Expert Answer

Step 1

To determine the incremental annual cash flow from operations, we need to first compute the contribution margin gained (afer tax) from the new production, margin lost (afer tax) in the regular sedan sales and the tax shield. Fixed costs are not included while calculating the incremental cash flows because fixed costs will exist regardless of investment.

Step 2
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