5.Consider a four-year project with the following information: initial fixed ass

Question

5.Consider a four-year project with the following information: initial fixed asset investment = $493598; straight-line depreciation to zero over the four-year life; zero salvage value; price = $32; variable costs = $26; fixed costs = $192555; quantity sold = 78535 units; tax rate = 34 percent. Calculate the sensitivity of the OCF to changes in the quantity sold. (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the "$" sign and commas in your response. For example, $1.2345 should be entered as 1.23.)

Explanation / Answer

Solution:

Initial cost of asset = 493598

Straight line depreciation per annum = 493598/4

= 123399.5

Calculation of OCF (Oprerating Cash Flow)

Sales (78535*32) = 2513120

(-) Variable costs (78535*26) = 2041910

(-) Fixed Costs = 192555

(-) Depreciation = 123399.5

EBIT = 155255.5

(-) Tax (0.34*155255.5) = 52786.87

(+) Depreciation = 123399.5

OCF = 225868.13

Sensitivity Analysis:

Let "x" be the sales quantity so that the OCF would break even at "0"

(32-26)*x - 192555 - 123399.5 - 52786.87 +123399.5 = 0

x =40890 units

which represents fall of (78535-40890)/78535 or 47.93%.

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