Question

Precise Machinery is analyzing a proposed project. The company expects to sell 7,500 units, ±10 percent. The expected variable cost per unit is $314 and the expected fixed costs are $647,000. Cost estimates are considered accurate within a ±4 percent range. The depreciation expense is $187,000. The sales price is estimated at $849 per unit, give or take 2 percent. The tax rate is 21 percent. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $850. What is the operating cash flow based on this analysis? Multiple Choice $2,354,874 $2,703,940 $1,986,675 $2,284,837 $2,293,089

Answer 1

Solution:

The operating cashflow (OCF), applies to the cash generated by the company from either the revenues it creates excluding long-capital or securities investments.

Operating cash flow is defined by the International Financial Accounting standards when cash produced from transactions, which is less tax and much less interest paid, income from investments and less dividend payments.

OCF {[(849 - $314) x 7,500] - $647,000} {1 - 0.21} + ($187,000 x 0.21)

= {4,012,500- $647,000}[0.79}+39,270

= $1,986,675