P11-17 Sensitivity Analysis [LO1] Consider a 10-year project with the following
ID: 2748702 • Letter: P
Question
P11-17 Sensitivity Analysis [LO1]
Consider a 10-year project with the following information: initial fixed asset investment = $340,000; straight-line depreciation to zero over the 10-year life; zero salvage value; price = $39; variable costs = $15; fixed costs = $163,200; quantity sold = 76,704 units; tax rate = 31 percent. The sensitivity of OCF to changes in quantity sold is $. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16).)
Consider a 10-year project with the following information: initial fixed asset investment = $340,000; straight-line depreciation to zero over the 10-year life; zero salvage value; price = $39; variable costs = $15; fixed costs = $163,200; quantity sold = 76,704 units; tax rate = 31 percent. The sensitivity of OCF to changes in quantity sold is $. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16).)
Explanation / Answer
Sensitivity of OCF = Change in OCF per unit change in quantity
Lets assume Quantity sold = 10,000
OCF = (Revenue - Cost) * (1-tax) = (10000 * 39 - 10000 * 15 - 163200) * ( 1-31%) = 52992.00
When Q = 10,001
OCF = (Revenue - Cost) * (1-tax) = (10001 * 39 - 10001 * 15 - 163200) * ( 1-31%) = 53008.56
So sensitivity = 53008.56 - 52992.00 = $16.56
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