We are evaluating a project that costs $1,180,000, has a five-year life, and has
ID: 2484362 • Letter: W
Question
We are evaluating a project that costs $1,180,000, has a five-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 88,100 units per year. Price per unit is $34.80, variable cost per unit is $21.05, and fixed costs are $761,000 per year. The tax rate is 40 percent, and we require a return of 10 percent on this project.
What is the sensitivity of OCF to changes in the variable cost figure? (A negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).)
If there is $1 decrease in estimated variable costs, how much would the increase in OCF be? (Round your answer to the nearest whole dollar amount (e.g., 1,234,567).)
Requirement 4:What is the sensitivity of OCF to changes in the variable cost figure? (A negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).)
Explanation / Answer
DEPERICATION OF PROJECT
= $1180000 / 5YEARS
= $236000
CHANGE IN OCF FOR $1 DECEREASE IN VARIABLE COST
INCEREASE IN CASH FLOW ($417485 - $364624) = $52861
FOR THE BOTH THE QUESTION ANSWER IS SAME AS CALCULATED ABOVE.
DETAILS AMOUNT SALES (88100 * $34.8) $3065880 LESS VARIABLE COST (88100 * $21.05) ($1854505) LESS FIXED COST ($761000) LESS DEPERICATION ($236000) NET INCOME $214375 LESS TAX @40% ($85750) NET INCOME AFTER TAX $128625 ADD DEPERICIATION $236000 NET OPERATING CASH FLOW $364624Related Questions
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