Consider a four-year project with the following information: initial fixed asset investment = $570,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $40; variable costs = $27; fixed costs = $245,000; quantity sold = 88,000 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.)

Question

Business

Liberty Hammond

20 November, 13:12

Consider a four-year project with the following information: initial fixed asset investment = $570,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $40; variable costs = $27; fixed costs = $245,000; quantity sold = 88,000 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.)

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Tara Potter · Answer 1

OCF to changes in quantity sold is sensetive to $10.14

Explanation:

OFC = [ (P - v) Q - FC] (1 - T) + TD

= [ (40 - 27) (88000) - 245000] (0.78) + 0.22 * (570000/4)

= $732,570

OFC when units are 88001

OFC = [ (P - v) Q - FC] (1 - T) + TD

= [ (40 - 27) (88001) - 245000] (0.78) + 0.22 * (570000/4)

= $732,580.14

sensitive is OCF to changes in quantity sold = $10.14

Therefore, OCF to changes in quantity sold is sensetive to $10.14