A project currently generates sales of $11.4 million, variable costs equal to 50

Question

A project currently generates sales of $11.4 million, variable costs equal to 50% of sales, and fixed costs of $3.4 million. The firm’s tax rate is 30%. a. What are the effects on the after-tax profits and cash flow, if sales increase from $11.4 million to $12.8 million. (Input all amounts as positive values. Do not round intermediate calculations. Enter your answers in millions rounded to 3 decimal places.) After-tax profit by $ million. Cash flow by $ million. b. What are the effects on the after-tax profits and cash flow, if variable costs increase to 70% of sales. (Input all amounts as positive values. Do not round intermediate calculations. Enter your answers in millions rounded to 3 decimal places.) After-tax profit by $ million. Cash flow by $ million. References

Explanation / Answer

a)

after tax profit at 11.4 million = (11.4 - 0.5 * 11.4 - 3.4) * (1-30%) million = 1.61 milion

after tax profit at 12.8 milion = (12.8 -0.5 * 12.8 - 3.4) * (1-30%) million = 2.1 million

difference = 0.49 million

b)

after tax profit at 11.4 million = (11.4 - 0.7 * 11.4 - 3.4) * (1-30%) million = 0.02 milion

after tax profit at 12.8 milion = (12.8 -0.7 * 12.8 - 3.4) * (1-30%) million = 0.308 million

difference = 0.288 million

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