Question

Assume a project has a sales quantity of 8,000 units, plus or minus 5 percent and a sales price of $70 a unit, plus or minus 1 percent. The expected variable cost per unit is $12±3 percent and the expected fixed costs are $300,000 plus or minus 2 percent. The depreciation expense is $70,000. The tax rate is 34 percent. What is the operating cash flow under the best-case scenario?

Answer 1

Annual Operating Cash Flow for the Best-Case Scenario

Annual Sales Units = 8,400 Units [8,000 Units x 105%]

Selling Price per unit = $70.70 per unit [$70.00 x 101%]

Variable cost per unit = $11.64 per unit [$12.00 x 97%]

Fixed Costs = $294,000 [$300,000 x 98%]

Depreciation Expense = $70,000

Therefore, the Annual Operating Cash Flow = [(Annual Sales – Variable costs – Fixed Costs) x (1 – Tax Rate)] + [Depreciation x Tax Rate]

= [{(8,400 x $70.70) – (8,400 x $11.64) - $294,000} x (1 – 0.34)] + [$70,000 x 0.34]

= [($593,880 - $97,776 - $294,000) x 0.66] + [$70,000 x 0.34]

= [$202,104 x 0.66] + [$70,000 x 0.34]

= $133,388.64 + $23,800

= $157,188.64

“Hence, the annual operating cash flow for the best-case scenario will be $157,188.64”