A project currently generates sales of $10.8 million, variable costs equal to 50

Question

A project currently generates sales of $10.8 million, variable costs equal to 50% of sales, and fixed costs of $2.9 million. The firm’s tax rate is 35%.

What are the effects on the after-tax profits and cash flow, if sales increase from $10.8 million to $12 million. (Input all amounts as positive values. Do not round intermediate calculations. Enter your answers in millions rounded to 3 decimal places.)

What are the effects on the after-tax profits and cash flow, if variable costs increase to 60% of sales.(Input all amounts as positive values. Do not round intermediate calculations. Enter your answers in millions rounded to 3 decimal places.)

A project currently generates sales of $10.8 million, variable costs equal to 50% of sales, and fixed costs of $2.9 million. The firm’s tax rate is 35%.

Explanation / Answer

Answer;

a.

Calculation of effect on cash flows

(Figures in Million $)

Current

Expected

Sales

$ 10.800

$   12.000

Less: Variable Cost (50%)

$ (5.400)

$   (6.000)

Less: Fixed Costs

$ (2.900)

$   (2.900)

Cash Flows

$    2.500

$     3.100

Less: Tax @35%

$ (0.875)

$   (1.085)

Cash Flows after tax

$    1.625

$     2.015

Hence Increase in cash flows after tax = (2.015 -1.625)

$     0.390

Hence Increase in cash flows = (3.1 -2.5)

$     0.600

b.

Calculation of effect on cash flows

(Figures in Million $)

Current

Expected

Sales

$ 10.800

$   12.000

Less: Variable Cost (60%)

$ (6.480)

$   (7.200)

Less: Fixed Costs

$ (2.900)

$   (2.900)

Cash Flows

$    1.420

$     1.900

Less: Tax @35%

$ (0.497)

$   (0.665)

Cash Flows after tax

$    0.923

$     1.235

Hence Increase in cash flows after tax = (1.235 -0.923)

$     0.312

Hence Increase in cash flows = (1.9-1.42)

$     0.480

a.

Calculation of effect on cash flows

(Figures in Million $)

Current

Expected

Sales

$ 10.800

$   12.000

Less: Variable Cost (50%)

$ (5.400)

$   (6.000)

Less: Fixed Costs

$ (2.900)

$   (2.900)

Cash Flows

$    2.500

$     3.100

Less: Tax @35%

$ (0.875)

$   (1.085)

Cash Flows after tax

$    1.625

$     2.015

Hence Increase in cash flows after tax = (2.015 -1.625)

$     0.390

Hence Increase in cash flows = (3.1 -2.5)

$     0.600

b.

Calculation of effect on cash flows

(Figures in Million $)

Current

Expected

Sales

$ 10.800

$   12.000

Less: Variable Cost (60%)

$ (6.480)

$   (7.200)

Less: Fixed Costs

$ (2.900)

$   (2.900)

Cash Flows

$    1.420

$     1.900

Less: Tax @35%

$ (0.497)

$   (0.665)

Cash Flows after tax

$    0.923

$     1.235

Hence Increase in cash flows after tax = (1.235 -0.923)

$     0.312

Hence Increase in cash flows = (1.9-1.42)

$     0.480

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