Question

Consider a four-year project with the following information: initial fixed asset investment = $595,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $45; variable costs = $39; fixed costs = $270,000; quantity sold = 103,000 units; tax rate = 22 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.)

Answer 1

Answer:

4.68

Explanation:

The computation of operating cash flow is shown below:-

Sales = $45 × 103,000                        $4,635,000    

Less: Variable cost $39 × 103,000     $4,017,000    

Contribution margin                             $618,000    

Less:- Fixed cost                                   $270,000    

EBITDA                                                   $348,000

Less: Depreciation ($595,000 ÷ 4)       $148,750    

EBIT                                                   $199,250    

Less: Tax (199250 × 0.22)                      $43,835    

Net income                                          $155,415    

Add: Depreciation                                    $148,750    

Operating cash flow                                  $304,165

Change in Operating cash flow = (Selling price - Variable cost per unit) × (1- Tax rate)

= ($45 - $39) × (1 - 0.22)  

= 6 × 0.78    

= $4.68

Operating cash flow (after increase in sales by 1 unit)    

Sales ($45× 103,001)                             $4,635,045    

Less: Variable cost (39 ×  103,001)        $4,017,039    

Contribution margin                               $618,006    

Less: Fixed cost                                     $270,000    

EBITDA                                                 $348,006

Less: Depreciation $595,000 ÷ 4  $148,750    

EBIT                                                          $199,256    

Less: Tax ($199,256 × 0.22)                    $43,836.32    

Net income                                               $155,419.68    

Add: Depreciation                                   $148,750    

Operating cash flow                               $304,169.68

Increase in operating cash flow = Cash flow after 1 unit increase in sales - Operating cash flow at current level.  

= $304,169.68 - $304,165  

= 4.68