Question

In: Finance

A project currently generates sales of $16 million, variable costs equal 50% of sales, and fixed...

A project currently generates sales of $16 million, variable costs equal 50% of sales, and fixed costs are $3.2 million. The firm’s tax rate is 40%. Assume all sales and expenses are cash items.

a. What are the effects on cash flow, if sales increase from $16 million to $17.6 million? (Input the amount as positive value. Enter your answer in dollars not in millions.)

Cash Flow____ by____

b. What are the effects on cash flow, if variable costs increase to 60% of sales? (Input the amount as positive value. Enter your answer in dollars not in millions.)

Cash Flow____ by____

Solutions

Expert Solution

Given,

Sales = $16 million or $16000000

Variable cost rate = 50% of sales

Fixed cost = $3.2 million or $3200000

Tax rate = 40% or 0.40

Solution :-

Variable cost = $16000000 x 50% = $8000000

Cash flow = (Sales - variable cost - fixed cost) x (1 - tax rate)

= ($16000000 - $8000000 - $3200000) x (1 - 0.40)

= $4800000 x 0.60 = $2880000

(a)

New sales = $17.6 million or $17600000

New variable cost = $17600000 x 50% = $8800000

Cash flow = (New sales - new variable cost - fixed cost) x (1 - tax rate)

= ($17600000 - $8800000 - $3200000) x (1 - 0.40)

= $5600000 x 0.60 = $3360000

Increase in cash flow = $3360000 - $2880000 = $480000

Cash flow increases by $480000

(b)

Variable cost rate = 60% of sales

New variable cost = $16000000 x 60% = $9600000

Cash flow = (sales - new variable cost - fixed cost) x (1 - tax rate)

= ($16000000 - $9600000 - $3200000) x (1 - 0.40)

= $3200000 x 0.60 = $1920000

Decrease in cash flow = $2880000 - $1920000 = $960000

Cash flow decreases by $960000.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

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,...
A project currently generates sales of $9million, variable costs equal 40% of sales, and fixed costs...
A project currently generates sales of $9million, variable costs equal 40% of sales, and fixed costs are $1.8 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 $9million to $9.9m? (Input the amount as positive value. Enter answer in dollars not millions) b. What are the effects on cash flow if variable costs increase to 55% of sales? (Input amount as a...
1-) Papers co. generates €10,000,000 in sales. Its variable costs equal 85.00% of sales and its...
1-) Papers co. generates €10,000,000 in sales. Its variable costs equal 85.00% of sales and its fixed costs are €500,000. Therefore, the company's operating income (EBIT) equals €1,000,000. The company estimates that if its sales were to increase 9.5%, its net income would increase 17.50%. Income tax rate is 35%. What is the company's interest expense? Build the Income statement, do not round intermediate calculations and present them all. 1.2-) Assume that a firm currently has EBIT of €2,000,000, a...
A project will generate sales of $52,900 each. The variable costs are $13,506 and the fixed...
A project will generate sales of $52,900 each. The variable costs are $13,506 and the fixed costs are $13,079. The project will use an equipment worth $111,251 that will be depreciated on a straight-line basis to a zero book value over a 9-year life of the project. If the tax rate is 23%, what is the operating cash flow? Note: Enter your answer rounded off to two decimal points.
A project will generate sales of $46,347 each. The variable costs are $19,519 and the fixed...
A project will generate sales of $46,347 each. The variable costs are $19,519 and the fixed costs are $19,215. The project will use an equipment worth $119,505 that will be depreciated on a straight-line basis to a zero book value over a 11-year life of the project. If the tax rate is 13%, what is the operating cash flow
A project generates $7,000 in revenue each year. It has the following costs: fixed cost:$1,200/year variable...
A project generates $7,000 in revenue each year. It has the following costs: fixed cost:$1,200/year variable cost: 65%of revenue depreciation: $400/year A) If sales increases by 20%, what will be the increase in pretax profits? (Hint: Calculate the base case pretax first then apply the sales growth) B) What is the degree of operating leverage (DOL) for this project?
It costs Concord Corporation $28 of variable costs and $16 of allocated fixed costs to produce...
It costs Concord Corporation $28 of variable costs and $16 of allocated fixed costs to produce an industrial trash can that sells for $82. A buyer in Mexico offers to purchase 3000 units at $33 each. Concord Corporation has excess capacity and can handle the additional production. What effect will acceptance of the offer have on net income?
Sales is $18 million, VC is 82% of Sales and Fixed Costs are 3 million. Depreciation...
Sales is $18 million, VC is 82% of Sales and Fixed Costs are 3 million. Depreciation will be $0.5 million a year. The project is for 5 years. Opportunity cost of capital is 8% What is the accounting breakeven revenue? What is the NPV breakeven?
A company produces a product that currently costs $8 in variable costs and $2 in fixed...
A company produces a product that currently costs $8 in variable costs and $2 in fixed costs. It sells the product for $14. If processed further, the company will spend an additional $6 in variable costs and $2 in fixed costs. Each unit would then be sold for $24. Why would the company choose to process further?
A company produces a product that currently costs $8 in variable costs and $2 in fixed...
A company produces a product that currently costs $8 in variable costs and $2 in fixed costs. It sells the product for $14. If processed further, the company will spend an additional $6 in variable costs and $2 in fixed costs. Each unit would then be sold for $24. Why would the company choose to process further?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT