Consider a three-year project with the following information: initial fixed asse
ID: 2777699 • 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.
How sensitive is OCF to changes in quantity sold? (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.
How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Explanation / Answer
OCF = ((33.75 - 22.40)*(94500) - 208,500)* (1-40%) + (0.40*(690000/4))
= 587,445
To check sensitivity, lets in increase units by 20% , then quanity will be 113,400 units
NEW OCF = ((33.75 - 22.40)*(113400) - 208,500)* (1-40%) + (0.40*(690000/4))
= 716,154
SENSITIVITY = chnage in OCF / chnage in quanity = (716,154 - 587,445) / (113400-94500) = 6.81