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

Question

Consider a four-year project with the following information: initial fixed asset investment = $480,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $32; variable costs = $22; fixed costs = $170,000; quantity sold = 78,000 units; tax rate = 32 percent.

How sensitive is OCF to changes in quantity sold? (Round your answer to 2 decimal places. (e.g., 32.16))

Consider a four-year project with the following information: initial fixed asset investment = $480,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $32; variable costs = $22; fixed costs = $170,000; quantity sold = 78,000 units; tax rate = 32 percent.

Explanation / Answer

At 78000 Units At 80000 Units Change 1 Sales Price $             32 $            32 2 Variable Cost $             22 $            22 3 Contribution/Unit (1-2) $             10 $            10 4 Units Sold         78,000        80,000        2,000 5 Total Contribution (3 x 4) $   780,000 $ 800,000 6 Fixed Cost $   170,000 $ 170,000 7 Depreciation ($480000/4) $   120,000 $ 120,000 8 Profit Before Tax(5-6-7) $   490,000 $ 510,000 9 Tax (32%) $   156,800 $ 163,200 10 Profit After Tax (8-9) $   333,200 $ 346,800 11 OCF (10+7) $   453,200 $ 466,800 $ 13,600 12 Sensitivity of OCF (Change in OCF/Change in Units Sold)          6.80

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