The Can-Do Co. is analyzing a proposed project. The company expects to sell 12,0

Question

The Can-Do Co. is analyzing a proposed project. The company expects to sell 12,000 units, give or take 4%. The expected variable cost per unit is $7 and the expected fixed cost is $36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 6% range. The depreciation expense is $30,000. The tax rate is 34%. The sale price is estimated at $14 a unit, give or take 5%. The company bases its sensitivity analysis on the expected case scenario.

What is the operating cash flow for a sensitivity analysis using total fixed costs?

Explanation / Answer

Operating cash flow for a sensitivity analysis using total fixed costs = $41,800

Operating Cash Flow = { [ (Selling price per unit – Variable cost per unit ) × No of units sold ] – Fixed costs – Depreciation } {1 – Tax Rate } + Depreciation

= { [ ($14 - 7 ) × 12,000 Units ] - 36,000 – 30,000 } {1 - 0.34} + $30,000

= [ {$84,000 – 36,000 – 30,000} x 0.66 ] + $30,000

= $11,880 + 30,000

= $41,800

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