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

4.68

Step-by-step 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