Consider a four-year project with the following information: initial fixed asset

Question

Consider a four-year project with the following information: initial fixed asset investment = $520,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $22; variable costs = $12; fixed costs = $160,000; quantity sold = 82,000 units; tax rate = 32 percent.

  

How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

  

Consider a four-year project with the following information: initial fixed asset investment = $520,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $22; variable costs = $12; fixed costs = $160,000; quantity sold = 82,000 units; tax rate = 32 percent.

Explanation / Answer

Answer

Sensitivity of OCF to Change in quantity Sold = Change in Operating Cash flow / Change in Quantity sold

= $6800 / 1000 = 6.8

Change in operating cash flow = $497200 - $ 490400 =$ 6800

Change in quantity sold = $ 83000 - $82000 = $1000

Depreciation =( Cost - salvage value ) / number of year = $520000 / 4 = $130000

Calcualtion of Operating Cash Flow Quantity Sold 82000 83000 Selling Price per unit 22 22 Sale value 1804000 1826000 Less:Variable cost 984000 996000 Contribution margin 820000 830000 Less: Fixed Cost 160000 160000 Less : Depreciation 130000 130000 EBIT 530000 540000 Less Tax @ 32% 169600 172800 EAT 360400 367200 Add: Depreciation 130000 130000 Operating Cash Flow 490400 497200

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