Question

Consider a three-year project with the following information: Initial fixed asset investment = $745,000; straight-line depreciation to zero over the 6-year life; zero salvage value; price = $39.95; variable costs = $28.73; fixed costs = $353,000; quantity sold = 94,000 units; tax rate = 21 percent. How sensitive is OCF to changes in quantity sold? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

Answer 1

The sensitivity of operating cash flow (OCF) to changes in quantity sold can be measured using the contribution margin. The change in OCF can be calculated by multiplying the contribution margin by the change in quantity sold.

Step-by-step explanation:

The sensitivity of Operating Cash Flow (OCF) to changes in quantity sold can be measured using the contribution margin. The contribution margin is calculated by subtracting the variable costs per unit from the price per unit. In this case, the contribution margin is $39.95 - $28.73 = $11.22 per unit. To determine the sensitivity of OCF, we need to calculate the change in OCF for a given change in quantity sold.

Let's say the quantity sold increases by x units from the initial 94,000 units. The change in OCF can be calculated as $11.22 * x. For example, if the quantity sold increases by 2,000 units, the change in OCF would be $11.22 * 2,000 = $22,440. This means that for every increase of 2,000 units in quantity sold, the OCF increases by $22,440.