# Consider a three-year project with the following information: initial fixed asset...

## Question:

Consider a three-year project with the following information:

initial fixed asset investment=$870,000 straight-line depreciation to zero over the five-year life zero salvage value price=$34.05

variable costs=$22.55 fixed costs=$210,000

quantity sold=96,000 units

tax rate=34%.

How sensitive is OCF to changes in quantity sold?

## Operating cash flow:

Operating income is the total profit made by the business by selling goods and services after accounting for all the expenses incurred. Operating cash flow is determined by adding depreciation and other non-cash expenses from net income.

OCF at 96,000 units can be calculated as follow:

Accounts Title Amount ($) Working Selling units 96,000 Sales 3,268,800 96,000 * 34.05 Less: Variable cost 2,164,800 96,000 * 22.55 Less: Fixed costs 210,000 Less: Depreciation 174,000 870,000/5 EBIT 720,000 Less: Taxes at 34% 244,800 Profit after taxes 475,200 Add: Depreciation 174,000 Operating cash flow 649,200 OCF at 100,000 units can be calculated as follow: Accounts Title Amount ($) Working
Selling units 100,000
Sales 3,405,000 100,000 * 34.05
Less: Variable costs 2,255,000 100,000 * 22.55
Less: Fixed costs 210,000
Less: Depreciation 174,000 870,000/5
EBIT 766,000
Less: Taxes at 34% 260,440
Profit after taxes 505,560
Operating cash flow 679,560

Sensitivity of the project OCF to changes in the quantity sold as follows:

{eq}OCF_{Sensitivity} \ = \ \dfrac{Change \ in \ OCF}{Change \ in \ quantity} \\ OCF_{Sensitivity} \ = \ \dfrac{OCF_{at \ 100,000 \ units} \ - \ OCF_{at \ 96,000 \ units}}{100,000 \ - \ 96,000} \\ OCF_{Sensitivity} \ = \ \dfrac{679,560 \ - \ 649,200}{4,000} \\ OCF_{Sensitivity} \ = \ \\$7.59 {/eq} 