Question

A business is analyzing a proposed 5-year project using standard sensitivity analysis. They expects to sell 23,000 units, ±5 percent. The expected variable cost per unit is $21.20 and the expected fixed costs are $150,000. The fixed and variable cost estimates are considered accurate within a ±5 percent range. The sales price is estimated at $35.60 a unit, ±5 percent. The project requires an initial investment of $324,000 for equipment that will be depreciated using the straight-line method to zero over the project's life. The equipment can be sold for $47,000 at the end of the project. The project requires $39,000 in net working capital up front. The discount rate is 13 percent and tax rate is 25 percent. What is the operating cash flow in year 2 under the optimistic case scenario?                    

$183,412.20                       

$195,217.60       

$218,884.50       

$207,535.60                       

$226,971.50

Answer 1

Answer is $221,584.50

Initial Investment = $324,000
Useful Life = 5 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $324,000 / 5
Annual Depreciation = $64,800

Base Case:

Units Sold = 23,000
Selling Price per unit = $35.60
Variable Cost per unit = $21.20
Fixed Costs = $150,000

Optimum Case:

Units Sold = 23,000 + 5% * 23,000
Units Sold = 24,150

Selling Price per unit = $35.60 + 5% * $35.60
Selling Price per unit = $37.38

Variable Cost per unit = $21.20 - 5% * $21.20
Variable Cost per unit = $20.14

Fixed Costs = $150,000 - 5% * $150,000
Fixed Costs = $142,500

Annual Operating Cash Flow = [(Selling Price per unit - Variable Cost per unit) * Units Sold - Fixed Costs] * (1 - tax) + tax * Depreciation
Annual Operating Cash Flow = [($37.38 - $20.14) * 24,150 - $142,500] * (1 - 0.25) + 0.25 * $64,800
Annual Operating Cash Flow = $273,846 * 0.75 + 0.25 * $64,800
Annual Operating Cash Flow = $221,584.50