We are evaluating a project that costs $1,180,000, has a five-year life, and has

Question

We are evaluating a project that costs $1,180,000, has a five-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 88,100 units per year. Price per unit is $34.80, variable cost per unit is $21.05, and fixed costs are $761,000 per year. The tax rate is 40 percent, and we require a return of 10 percent on this project.

What is the sensitivity of OCF to changes in the variable cost figure? (A negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).)

If there is $1 decrease in estimated variable costs, how much would the increase in OCF be? (Round your answer to the nearest whole dollar amount (e.g., 1,234,567).)

Requirement 4:

What is the sensitivity of OCF to changes in the variable cost figure? (A negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

DEPERICATION OF PROJECT

= $1180000 / 5YEARS

= $236000

CHANGE IN OCF FOR $1 DECEREASE IN VARIABLE COST

INCEREASE IN CASH FLOW ($417485 - $364624) = $52861

FOR THE BOTH THE QUESTION ANSWER IS SAME AS CALCULATED ABOVE.

DETAILS AMOUNT SALES (88100 * $34.8) $3065880 LESS VARIABLE COST (88100 * $21.05) ($1854505) LESS FIXED COST ($761000) LESS DEPERICATION ($236000) NET INCOME $214375 LESS TAX @40% ($85750) NET INCOME AFTER TAX $128625 ADD DEPERICIATION $236000 NET OPERATING CASH FLOW $364624

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.