Black System is analyzing a proposed 3-year project using standard sensitivity a

Question

Black System is analyzing a proposed 3-year project using standard sensitivity analysis. The company expects to sell 12,000 units, ±5 percent. The expected variable cost per unit is $7 and the expected fixed costs are $28,000. The fixed and variable cost estimates are considered accurate within a ±5 percent range. The sales price is estimated at $16 a unit, ±4 percent. The project requires an initial investment of $153,000 for equipment that will be depreciated using the straight-line method to zero over the project's life. The equipment can be sold for $29,000 at the end of the project. The project requires $14,000 in net working capital up front. The discount rate is 14 percent and tax rate is 25 percent. What is the operating cash flow in year 2 under the optimistic case scenario?

$84,006.19

$87,205.50

$91,354.88

$95,418.60

$98,744.15

$84,006.19

$87,205.50

$91,354.88

$95,418.60

$98,744.15

Explanation / Answer

Under the optimistic scenario, every variable will be in our favour. Sales will be higher and costs will be lower.

Sales units = 12000 + 5% = 12600

Selling price = $16 + 4% = $16.64

Variable cost = $7 - 5% = $6.65

Fixed cost = $28000 - 5% = $26600

Operating Cash Flow in year 2 Sales (12600 x 16.64) 209664 Less: Variable costs (12600 x 6.65) 83790 Less: Fixed costs 26600 Less: Depreciation (153000 / 3) 51000 Earnings before tax 48274 Less: Tax @25% 12068.50 Net Income 36205.50 Add: Depreciation 51000 Operating cash flow 87205.50

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.