Consider a three-year project with the following information: initial fixed asse
ID: 2738931 • Letter: C
Question
Consider a three-year project with the following information: initial fixed asset investment = $686,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $33.55; variable costs = $22.30; fixed costs = $207,500; quantity sold = 93,500 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 94,500 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 = $686,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $33.55; variable costs = $22.30; fixed costs = $207,500; quantity sold = 93,500 units; tax rate = 40 percent.
Explanation / Answer
Calculate the OCF at the base case quantity sold:
OCF = [(Selling price – Variable cost)*Quantity – Fixed cost] * (1-Tax) + (Tax * Depreciation)
= [($33.55 - $22.30)*93,500 - $207,500] * (1-0.40) + (0.40 * $686,000/4)
= [($11.25)*93,500 -$207,500] * 0.60 + $68,600
=$575,225
Calculate the OCF at 94,500 units sold:
OCF = [(Selling price – Variable cost)*Quantity – Fixed cost] * (1-Tax) + (Tax * Depreciation)
= [($33.55 - $22.30)*94,500 - $207,500] * (1-0.40) + (0.40 * $686,000/4)
= [($11.25)*94,500 -$207,500] * 0.60 + $68,600
= $581,975.
Calculate the sensitive is OCF to changes in quantity sold:
Sensitivity = OCF / Q
= ($575,225 - $581,975) / (93,500 -94,500)
= -$6,750 / -1,000
= $6.75
For every additional unit sold, OCF goes up by $6.75.