Problem 9-22 Sensitivity Analysis [LO 3] Consider a three-year project with the

Question

Problem 9-22 Sensitivity Analysis [LO 3]

Consider a three-year project with the following information: initial fixed asset investment = $698,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $34.15; variable costs = $22.60; fixed costs = $210,500; quantity sold = 96,500 units; tax rate = 40 percent.

How sensitive is OCF to changes in quantity sold? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).)

Consider a three-year project with the following information: initial fixed asset investment = $698,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $34.15; variable costs = $22.60; fixed costs = $210,500; quantity sold = 96,500 units; tax rate = 40 percent.

Explanation / Answer

OCF = {(p-v) *q -Fc}*(1-tc) + tc * D

OCF = ((34.15-22.60)*96500 - 210500) * (1-0.4) + 0.4 * 698000/4

=612245

no matter what the quantity of units sold, sensitivity will be same

suppose if we increase the quantity of 1000 units

OCF new = ((34.15-22.60)*97500 - 210500) * (1-0.4) + 0.4 * 698000/4

=619175

sensitivity = delta OCF/delta Q

= 619175-612245/97500-96500

=6.93

hence OCF will increase by 6.93 for every unit sold

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