A project currently generates sales of $11.5 million, variable costs equal to 40

ID: 2713680 • Letter: A

Question

A project currently generates sales of $11.5 million, variable costs equal to 40% of sales, and fixed costs of $3.5 million. The firm’s tax rate is 35%.

What are the effects on the after-tax profits and cash flow, if sales increase from $11.5 million to $12.5 million. (Input all amounts as positive values. Do not round intermediate calculations. Enter your answers in millions rounded to 3 decimal places.)

After-tax profit (decrease/increase) by:
Cash flow (decrease/increase) by:

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.)

After-tax profit (decrease/increase) by:
Cash flow (decrease/increase) by:

A project currently generates sales of $11.5 million, variable costs equal to 40% of sales, and fixed costs of $3.5 million. The firm’s tax rate is 35%.

After-tax profit (decrease/increase) by:
Cash flow (decrease/increase) by:

Explanation / Answer

Increase in CF = increase in after tax profit = increas in sales adjusted for variable cost *(1 - tax rate) =

(12.5 - 11.5 )*( 1 - 0.4)*( 1 - 0.35) = 0.39m

Decrease in CF = decrease in after tax profit = sales * ( -(incease in variable cost %age)* (1 - tax rate)

= 11.5 * ( 0.4 -0.6) * ( 1 -0.35) = 1.495m

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A project currently generates sales of $11.5 million, variable costs equal to 40

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