Question

Please help me to solve this question.​​​​​​​

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A project currently generates sales of $9.8 million, variable costs equal to 39% of sales, and fixed costs of $1.3 million. The firm's tax rate is 35%. What are the effects of the following changes on after-tax profits and cash flows? Sales increase from $9.8 million to $11.8 million. What are the effects on after-tax profits and cash flows? (Round your answers to 3 decimal places. Enter your answers in millions of dollars.) a. After-tax profits increase by s 0.52 After-tax cash flow increase by $ 0.52 O mi llion b. Variable costs increase to 49% of sales. What are the effects on after-tax profits and cash flows? (Round your answers to 3 decimal places. Enter your answers in millions of dollars.) After-tax profits decreaseby $ 0.98 million After-tax cash flow decrease b y $ 0.980 million

Answer 1

Since there is no component of non cash nature like Dep etc so increase or decrease in cash will be same as
Increase or decrease in profits
	Base case	Sale increase
Sale	9.80	11.80
Variable cost	(3.82)	(4.60)
Contribution	5.98	7.20
Fixed cost	(1.30)	(1.30)
Profit	4.68	5.90
Tax	(1.64)	(2.06)
Profit after tax	3.04	3.83
Increase in profit and cash flow		0.79
	Base case	Variable cost increase
Sale	9.80	9.80
Variable cost	(3.82)	(4.80)
Contribution	5.98	5.00
Fixed cost	(1.30)	(1.30)
Profit	4.68	3.70
Tax	(1.64)	(1.29)
Profit after tax	3.04	2.40
Decrease in Profits and cash flow		(0.64)