Question

Consider a project with the following information: Initial fixed asset investment - $550,000 straight-line depreciation to zero over the 4-year life; zero salvage value: ole costs = $35: fixed costs = $228,000, quantity sold = 116,000 units tax rate = 23 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.) AOCFIAQ

Answer 1

Depreciation for each year	(Cost - Salvage value)/Estimated useful life
Depreciation for each year	(550000-0)/4
Depreciation for each year	$137,500
Calculation of operating cash flow if units sold are 116,000.
Sales revenue	$6,264,000	(116000*54)
Variable costs	-$4,060,000	(116000*35)
Fixed costs	-$228,000
Depreciation	-$137,500
Income before taxes	$1,838,500
Taxes @ 23%	-$422,855	1838500*23%
Net income	$1,415,645
Depreciation	$137,500
Operating cash flow	$1,553,145
Calculation of operating cash flow if units sold are 117,000.
Sales revenue	$6,318,000	(117000*54)
Variable costs	-$4,095,000	(117000*35)
Fixed costs	-$228,000
Depreciation	-$137,500
Income before taxes	$1,857,500
Taxes @ 23%	-$427,225	1857500*23%
Net income	$1,430,275
Depreciation	$137,500
Operating cash flow	$1,567,775
Sensitivity of OCF to change in quantity	(1553145-1567775)/(116000-117000)
Sensitivity of OCF to change in quantity	$14.63
Change in OCF/Change in quantity	$14.63