Consider a three-year project with the following information: initial fixed asse
ID: 2723993 • Letter: C
Question
Consider a three-year project with the following information: initial fixed asset investment = $690,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $33.75; variable costs = $22.40; fixed costs = $208,500; quantity sold = 94,500 units; tax rate = 40 percent.
What is the OCF at the base-case quantity sold? (Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).)
What is the OCF at 95,500 units sold? (Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).)
How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations. Round your answer as directed but do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Consider a three-year project with the following information: initial fixed asset investment = $690,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $33.75; variable costs = $22.40; fixed costs = $208,500; quantity sold = 94,500 units; tax rate = 40 percent.
Explanation / Answer
1) Calculation of Operating Cash Flows at Base Unit 94500.
Sales (94500 * 33.75) 3189375
Less: Variable Cost (94500*22.40) (2116800)
Less: Fixed Cost (208500)
Operating cash flow before tax 864075
Less: Taxes(40% of 864075) 345630
Add: Tax shield on Depreciation(working note) 69000
Net Operating Cash Flows(OCF) $ 587445
OCF at 94500 Units $587445
2) Calculation of Operating Cash Flows at 95500 units.
Sales (95500 * 33.75) 3223125
Less: Variable Cost (95500*22.40) (2139200)
Less: Fixed Cost (208500)
Operating cash flow before tax 875425
Less: Taxes(40% of 875425) 350170
Add: Tax shield on Depreciation(working note) 69000
Net Operating Cash Flows(OCF) $ 594255
OCF at 95500 Units $594255
Working Note 1: Tax Shield on Depreciation = (690000/4) *40% = 69000
3) Sensitiveness of OCF to changes in quantity sold
Change in OCF = 594255-587445 = $ 6810
Change in Quantity= 95500-94500 = 1000 Units
Sensitveness= 6810/1000 = 6.810
OCF/Q = $ 6.81
Hence, OCF will increase by $6.81 for every additional unit sold.