Stellar Plastics is analysing a proposed project. The company expects to sell 11

Question

Stellar Plastics is analysing a proposed project. The company expects to sell 11,000 units, give or take 3 percent. The expected variable cost per unit is $7.00 and the expected fixed cost is $35,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $33,000. The tax rate is 34 percent. The sale price is estimated at $16.00 a unit, give or take 5 percent. What is the operating cash flow for a sensitivity analysis using total fixed costs of $32,000?

A) $15,180.00 B) $76560.00 C) $23,000.00 D) $48,180.00 E) $55440.00 (Just need the answer, no need for process)

Explanation / Answer

In this case only fixed cost is sensitive:

EBIT = (price – variable cost per unit) x no. of units – fixed cost – depreciation

         = (16 - 7) x 11,000 – 32,000 -33000

         = 34,000

Operating Cash Flow = EBIT x (1-t) + Depreciation

                                          = 34,000 x (1-0.34) + 33,000

                                          = 22,440 + 33,000

                                          = 55,440

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