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A 5-year project is expected to generate annual sales of 9,600 units at a price of $83 per

A 5-year project is expected to generate annual sales of 9,600 units at a price of $83 per unit and a variable cost of $54 per unit. The equipment necessary for the project will cost $373,000 and will be depreciated on a straight-line basis over the life of the project. Fixed costs are $225,000 per year and the tax rate is 22 percent. How sensitive is the operating cash flow to a $1 change in the per unit sales price?

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Expert Solution

First we have to find Operating cash flow at sale price of $83 per unit.

Units

9600
Annual Sale at 83

796800
Less VC at 54

518400
Contribution

278400
FC

225000
EBITDA

53400
Depriciation

74600
EBT

97000
Tax at 22%

21340
EAT

75660
Add : Depriciation

74600
Free Cash Flow = A

150260

 

First we have to find Operating cash flow at sale price of $82 per unit.

Units

9600
Annual Sale at 82

787200
Less VC at 54

518400
Contribution

268800
FC

225000
EBITDA

43800
Depriciation

74600
EBT

106600
Tax at 22%

23452
EAT

83148
Add : Depriciation

74600
Free Cash Flow = B

157748

 

 

Sensitive is the operating cash flow to a $1 change in the per unit sales price = $7488.

Sensitive is the operating cash flow to a $1 change in the per unit sales price = $7488.

Junaid answered 3 years ago
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