10.00 points Consider a four-year project with the following information: Initia

Question

10.00 points Consider a four-year project with the following information: Initial fixed asset investment $520,000; straight-line depreciation to zero over the four-year life, zero salvage value: price = $22; variable costs = $12. fixed costs = S1 60,000; quantity sold = 82,000 units; tax rate = 32 percent. How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) References eBook & Resources Worksheet Difficulty: 2 Intermediate Section: 7.1 Sensitivity Analysis, Scenario Analysis, and Break-even Analysis

Explanation / Answer

OCF = (Sales - Costs)*(1-tax) + Tax*depreciaiton

OCF = (82000*(22-12) - 160000)*(1-0.32) + 0.32*520000/4 = 490400

Now find the OCF at 830000 units

OCF = (83000*(22-12) - 160000)*(1-0.32) + 0.32*520000/4 = 497200

Sensitivity = change in OCF / Change in units = (497200 - 490400) / (83000-82000) = $6.80

OCF will increase by $6.80 for every unit sold.

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