Consider a four-year project with the following information: initial fixed asset investment = $550,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $36; variable costs = $24; fixed costs = $225,000; quantity sold = 76,000 units; tax rate = 23 percent. How sensitive is OCF to changes in quantity sold?

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Business

Amara

10 February, 00:22

Consider a four-year project with the following information: initial fixed asset investment = $550,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $36; variable costs = $24; fixed costs = $225,000; quantity sold = 76,000 units; tax rate = 23 percent. How sensitive is OCF to changes in quantity sold?

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Krista Stuart · Answer 1

The OCF will increase $9.24 for every additional unit sold

Explanation:

OCF = ((price - Variable cost) * (Quantity - Fixed cost)) (1 - tax rate) + Tax rate*Depreciation

OCF at 76000 units level = ((36 - 24) (76000 - 225000)) (1 - 0.23) + 0.23*550000/4

= (912000 - 225000) * 0.77 + 0.23 * 137500

= 528990 + 31625

= $560615

OCF at 75000 units level = ((36 - 24) (75000 - 225000) (1 - 0.23) + 0.23*550000/4

= 519750 + 31625

= $551375

The sensitivity of changes in OCF to quantity sold

= $560615 - $551375 / (76000 - 75000)

= + 9.24

Therefore, The OCF will increase $9.24 for every additional unit sold.