Question

Lawrence is analyzing a proposed 3‐year project using standard sensitivity analysis. The company expects

to sell 18,000 units, ±4 percent. The expected variable cost per unit is $12 and the expected fixed costs are

$60,000. The fixed and variable cost estimates are considered accurate within a ±5 percent range. The

sales price is estimated at $17 a unit, ±5 percent. The project requires an initial investment of $162,000 for

equipment that will be depreciated using the straight‐line method to zero over the project's life. The

equipment can be sold for $49,000 at the end of the project. The project requires $17,500 in net working

capital for the three years. The discount rate is 12 percent and tax rate is 25 percent. What is the operating

cash flow under the optimistic case scenario?

A. $55,667 B. $58,912 C. $61,308 D. $64,342 E. $67,115

Answer 1

Sales	$             334,152	=18000*(1+4%)*17*(1+5%)
Less:
Costs	$             270,408	=18000*(1+4%)*12*(1-5%)+60000*(1-5%)
Depreciation	$               54,000	=162000/3
EBT	$                  9,744
Less: Tax payable @ 25%	$                  2,436
Net income	$                  7,308
Add: Depreciation	$               54,000
Operating cash flow	$    61,308