Consider a five-year project with the following information: initial fixed asset

Question

Consider a five-year project with the following information: initial fixed asset investment = $740,000; straight-line depreciation to zero over the ten-year life; zero salvage value; price = $43/unit; variable costs = $28/unit; fixed costs = $395,000 per year; quantity sold = 150,000 units per year; tax rate = 25%. How sensitive is OCF to changes in quantity sold (i.e., what is the change in OCF given an increase of one unit sold in a year)?

$11.25

$10.48

$12.27

$11.84

$11.81

$11.25

$10.48

$12.27

$11.84

$11.81

Explanation / Answer

Statement showing Operarting cash flow for different level

Thus Sensitivity of OCF to change in quantity sold = 1409750-847250 / 150000-100000

=562500/50000

=11.25$

Particular Amount Amount SPPU 43 43 VCPU 28 28 CPU 15 15 No of units 150000 100000 Contribution 2250000 1500000 Fixed cost 395000 395000 Depreciation 74000 74000 PBT 1781000 1031000 Tax @ 25% 445250 257750 PAT 1335750 773250 Add: Depreciation 74000 74000 Cash flow 1409750 847250

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