Question

Consider a five-year project with the following information: initial fixed asset investment = $1,060,000; straight-line depreciation to zero over the ten-year life; zero salvage value; price = $42.50/unit; variable costs = $19.70/unit; fixed costs = $412,000 per year; quantity sold = 200,000 units per year; tax rate = 25%. How sensitive is OCF to changes in quantity sold (i.e., what is the change in OCF given an increase of one unit sold in a year)?

		$17.10
		$16.22
		$15.41
		$14.63
		$18.59

Answer 1

OCF sensitivity to change in units:
= (Price per unit-Cost per unit)×(1-Tax rate)
= ($42.50-$19.70)×(1-25%)
= $17.10
Hence, OCF sensitivity is $17.10