Question

Consider a three-year project with the following information: initial fixed asset investment = $674,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $32.95; variable costs = $22.00; fixed costs = $204,500; quantity sold = 90,500 units; tax rate = 40 percent. a) What is the OCF at the base-case quantity sold? b) What is the OCF at 91,500 units sold? c) How sensitive is the OCF to change in quantity sold?

Answer 1

(a and b) Calculate the Operating cash flow (OCF) as follows Particulars Asset investment Quantity sol Base-case Increased quantity $674,000.00 91,500.00 $32.95 $3,014,925.00 [91,500.00x$32.95] $22.00 $2,013,000.00 91,500.00x $22.00] $204,500.00 S674,000.00 90,500.00 $32.95 $2,981,975.00 es price per unit es [90,500.00x S32.95 Variable cost per unit Less Variable cost $22.00 $1,991,000.00 [90,500.00x $22.00] $204,500.00 Less Fixed cost Net revenue Less Tax rate at 40% Revenue after tax $797,425.00 $318,970.00 $786,475.00 314,590.00 $471,885.00 $67,400.00 $478,455.00 $67,400.00 Depreciation tax shield $674,000 x 40% 4 Operating cash flow (OCF) S539,285.00 S545,855.00 Calculate the sensitivity of OCF to change in quantity sold as follows ChangeOCF Change in quantity sold $545,855.00 $539,285.00 Sensitivity- 91,500.00-90,500.00 $6,570 1,000 $6.57