Answer:
for every 1% increase in the quantity sold, OCF increases by 1.24%
for every 1% decrease in the quantity sold, OCF decreases by 1.24%
Explanation:
Consider a four-year project with the following information: initial fixed asset investment = $555,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $37; variable costs = $25; fixed costs = $230,000; quantity sold = 79,000 units; tax rate = 24 percent. How sensitive is OCF to changes in quantity sold?
initial outlay = $555,000
depreciation expense per year = $555,000 / 4 = $138,750
contribution margin per unit = $37 - $25 = $12
quantity sold = 79,000 units
tax rate = 24%
fixed costs = $230,000
OCF = {[(79,000 x $12) - $230,000 - $138,750] x (1 - 24%)} + $138,750 = $578,980
if sales increase by 10%, OCF = {[(86,900 x $12) - $230,000 - $138,750] x (1 - 24%)} + $138,750 = $651,028 ⇒ 12.44% increase
if sales decrease by 10%, OCF = {[(71,100 x $12) - $230,000 - $138,750] x (1 - 24%)} + $138,750 = $506,932 ⇒ 12.44% decrease
