Question

Consider a 5-year project with an initial fixed asset investment of $324,000, straight-line depreciation to zero over the project's life, a zero salvage value, a selling price of $34, variable costs of $17, fixed costs of $189,700, a sales quantity of 94,000 units, and a tax rate of 21 percent. What is the sensitivity of OCF to changes in the sales price?

• $59,470 per $1 of sales

• $61,600 per $1 of sales

• $78,700 per $1 of sales

• $74,260 per $1 of sales

• $68,850 per $1 of sales

Answer 1

OCF is operating cash flow

It can be calculated by deducting taxes and depreciation from earning before interest and tax.

Depreciation value every year = Initial Investment we have done in the project/ No of years

Depreciation = 324000/5 = 64800

Operating cash flow at sale of 94000 units would be

Initial Investment	324000
Sales quantity		94000
Sale price		34
Variable costs		17
Total Contribution		1598000
Fixed Costs		189700
EBITDA		1408300
Depreciation		64800
Tax rate		21%
Tax after removing depreciation		282135
Adding back depreciation to get net Income after removing tax		1190965

This is the operating cash flow from this project now we have to calculate the sensitivity of this number with sales price

1% reduction in sales price will change this OCF number to

New Sales price = 34*0.99 = 33.66

Initial Investment	324000
Sales quantity		94000
Sale price		33.66
Variable costs		17
Total Contribution		1566040
Fixed Costs		189700
EBITDA		1376340
Depreciation		64800
EBIT		1311540
Tax rate		21%
Tax after removing depreciation		275423.4
Adding back depreciation to get net Income after removing tax		1165717

So net change in OCF. is [1- (1165717)/(1190965)]*100 = 2.12 %