a project currently generates sales of $14 million, variable costs equal 50% of

Question

a project currently generates sales of $14 million, variable costs equal 50% of sales, an fixed costs are $2.8 million. the firm's tax rate is 40%. Assume all sales and expenses are cash items.

a. what are the effects on cash flow, if sales increase from $14 million to $15.4 million? (Input the amount as positive value. Enter your answer in dollars no in millions)

cash flow (increase or decrease)  by $____________

b. what are the effects on cash flow, if variable costs increase to 60% of sales? (Input the amount as positive value. Enter your answers in dollars not in millions)

cash flow (increase or decrease) by $___________

Explanation / Answer

a) Sales before increase

Cash flows = [$ 14 million sales - $ 7 million variable costs - $ 2.8 million fixed costs ] X ( 1 - 0.40)

Cash flows = $ 2.52 million

If sales is increased to $ 15.40 million

Cash flows = [ $15.40 million - $ 7.70 million - $ 2.80 milliion ] X ( 1 - 0.40)

Cash flows = $ 2.94 million

The cash flow increases by 0.42 million

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b) If variable costs increases by 60% of the sales

Cash flows = [ $ 14 - $ 8.4 - $ 2.8 million ] X ( 1 - 0.40)

Cash flows = $ 1.68

The cash flow decreases by 0.84 million

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