A project currently generates sales of $11.4 million, variable costs equal to 50

Question

A project currently generates sales of $11.4 million, variable costs equal to 50% of sales, and fixed costs of $3.2 million. The firm’s tax rate is 20%.

a. What are the effects on the after-tax profits and cash flow, if sales increase from $11.4 million to $13.5 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 increased/decreased by $_______ million.

Cash flow increased/decreased by $___________ million.

b. 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 increased/decreased by $________ million.

Cash flow increased/decreased by $________ million.

Explanation / Answer

a.

After-tax profit increased/decreased by

After-tax profit increased = ( Increase in Sale*(1-variable expenses%))*(1-tax rate)

After-tax profit increased = (13.5 - 11.4)*(1-50%) *(1-20%)

After-tax profit increased = 0.840

Answer

After-tax profit increased = 0.840 million.

Cash flow increased

Cash flow increased = ( Increase in Sale*(1-variable expenses%))*(1-tax rate)

Cash flow increased = (13.5 - 11.4)*(1-50%) *(1-20%)

Cash flow increased = 0.840

Answer

Cash flow increased $ 0.840 million.

b. 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 decreased by

After-tax profit decreased = (Sale*(Increase in Variable cost%))*(1-tax rate)

After-tax profit decreased =(11.4*(60%-50%))*(1-20%)

After-tax profit decreased = $ 0.912 Million

Answer

After-tax profit decreased = $ 0.912 million.

Cash flow increased/decreased by

Cash flow decreased = (Sale*(Increase in Variable cost%))*(1-tax rate)

Cash flow decreased =(11.4*(60%-50%))*(1-20%)

Cash flow decreased = $ 0.912 Million

Answer

Cash flow decreased = $ 0.912 million.

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