Question

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

OFC = [(P - v)Q - FC](1 - T) + TD

OCF = [($46 - $12) × 84,000) - $195,000][1 - 0.34] + [($275,000/4) × 0.34] = $1,779,635

OFC when units are 84,001:

OCF = [($46 - $12) × 84,001) - $195,000][1 - 0.34] + [($275,000/4) × 0.34] = $1,779,657.44

Sensitivity = ($1,779,657.44 - $1,779,635) / (84,001 - 84,000)

Sensitivity = $22.44