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A project currently generates sales of $15 million, variable costs equal 60% of sales, and fixed...

A project currently generates sales of $15 million, variable costs equal 60% of sales, and fixed costs are $3.0 million. The firm’s tax rate is 30%. Assume all sales and expenses are cash items.

a. What are the effects on cash flow, if sales increase from $15 million to $16.5 million? (Input the amount as positive value. Enter your answer in dollars not in millions.)

Cash flow: increases or decreses by __________?

b. What are the effects on cash flow, if variable costs increase to 65% of sales? (Input the amount as positive value. Enter your answer in dollars not in millions.)

Cash flow: increases or decreses by __________?

Solutions

Expert Solution

Let us first calculate the actual current cashflow.

Sales = $15 mil

Variable Cost = 60% * $15 mil = $9mil

Fixed cost = $3 mil

Profit before tax = Sales - Variable Cost - Fixed Cost = $3 mil

Tax expense (@30%) = $0.9 mil

Profit after tax = $3 mil - $0.9 mil = $2.1 mil

Part a - Sales increase to $16.5 mil

Sales = $16.5 mil

Variable Cost = 60% * $16.5 mil = $9.9mil

Fixed cost = $3 mil

Profit before tax = Sales - Variable Cost - Fixed Cost = $3.6 mil

Tax expense (@30%) = $1.08 mil

Profit after tax = $3.6 mil - $1.08 mil = $2.52 mil

Cash flow increases by $0.42 mil --> Answer

Part b - Variable Costs increase to 65% of sales

Sales = $15 mil

Variable Cost = 65% * $15 mil = $9.75mil

Fixed cost = $3 mil

Profit before tax = Sales - Variable Cost - Fixed Cost = $2.25 mil

Tax expense (@30%) = $0.675 mil

Profit after tax = $2.25 mil - $0.675 mil = $1.575 mil

Cash flow decreases by 0.525 mil --> Answer

jeff jeffy answered 2 years ago
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