Question

Question 18 10 points Save Answer Consider a four-year project with the following information: initial fixed asset investment = $275,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $46; variable costs = $12; fixed costs = $195,000; quantity sold = 84,000 units; tax rate = 34%. How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) (Do not forget to include + or - sign)

Answer 1

Initial Investment = $275,000
Useful Life = 4 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $275,000 / 4
Annual Depreciation = $68,750

If quantity sold is 84,000 units:

OCF = [(Price - Variable Costs) * Quantity Sold - Fixed Costs] * (1 - Tax Rate) + Tax Rate * Depreciation
OCF = [($46 - $12) * 84,000 - $195,000] * (1 - 0.34) + 0.34 * $68,750
OCF = $2,661,000 * 0.66 + 0.34 * $68,750
OCF = $1,779,635.00

If quantity sold is 84,001 units:

OCF = [(Price - Variable Costs) * Quantity Sold - Fixed Costs] * (1 - Tax Rate) + Tax Rate * Depreciation
OCF = [($46 - $12) * 84,001 - $195,000] * (1 - 0.34) + 0.34 * $68,750
OCF = $2,661,034 * 0.66 + 0.34 * $68,750
OCF = $1,779,657.44

Sensitivity of OCF = Change in OCF / Change in Quantity Sold
Sensitivity of OCF = ($1,779,657.44 - $1,779,635.00) / (84,001 - 84,000)
Sensitivity of OCF = $22.44