Consider a project with the following information: Initial fixed asset investment = $515,000; straight-line depreciation to zero over the 4-year life; zero salvage value; price = $47; variable costs = $29; fixed costs = $207,000; quantity sold = 102,000 units; tax rate = 21 percent.  How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)find the change in OCF/Change in Q

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Asked Nov 11, 2019
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Consider a project with the following information: Initial fixed asset investment = $515,000; straight-line depreciation to zero over the 4-year life; zero salvage value; price = $47; variable costs = $29; fixed costs = $207,000; quantity sold = 102,000 units; tax rate = 21 percent.

  

How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

find the change in OCF/Change in Q

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Expert Answer

Step 1

The initial fixed investment cost is $515,000. So, annual depreciation will be ($515,000 ÷ 4) = $128,750.

The operating cashflow can be calculated with the help of below expression:

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Sales price Quantity x -Variable cost Таx Operating cashflow= - xDepreciation -Fixed cost (x(1-Тах)

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Step 2

Substitute 102,000 for quantity, $47 for sales price, $29 for variable cost, $207,000 for fixed cost, 21% for tax and $128,750 for depreciation in the above expression,

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[102,000x (S47-$29)- $207,000] x (1- 219%); Operating cashflow +(21%x$128,750) -[(102, 000x $18)-$207,000] x (79%) + $27,03 7.50 $1,629,000x 79%+ $27,037.50 $1, 286,910+$27, 037.50 $1,313,947.50

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Step 3

If quantity sold is increase by 1 unit, th...

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102,001x (S47-$29)- $207,000]x (1-219%)| Operating cashflow +(21%x$128,750) -[(102,001x $18)-$207,000]x (79%) +S27,037.50 $1,629,018x79%+ $27,037.50 $1,286,924.22+ $27,037.50 $1,313,961.72

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