Question

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? |

find the change in OCF/Change in Q

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:

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,

Step 3

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

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