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 = $580,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $32; variable costs = $24; fixed costs = $220,000; quantity sold = 88,000 units; tax rate = 34 percent.

  

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

  

Consider a four-year project with the following information: initial fixed asset investment = $580,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $32; variable costs = $24; fixed costs = $220,000; quantity sold = 88,000 units; tax rate = 34 percent.

Explanation / Answer

Note: Assuming Fixed cost includes Depriciation expenses

Depriciation = Cost / Useful life

Depriciation = $580,000 / 4 = $145,000

OCF = Net income + Depriciation

OCF1 = $319,440 + $145,000 = $464,440

OCF 2= $330,000+ $145,000 = $475,000

OCF/Q = ($464,440 - $475,000 ) / (88,000-90,000)

OCF/Q = (10560 / 2000) = +5.28

88,000 units 90,000 Sales (88,000*32) $2,816,000 2,880,000 Less variable cost (88,000*24) (2,112,000) (2,160,000) Contribution $704000 $720,000 Less fixed cost ( $220,000) (220,000) Income before tax $484,000 500,000 Less tax($484,000*0.34) ($164,560) 170,000 Net Income $319,440 330,000

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