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Precise Machinery is analyzing a proposed project. The company expects to sell 2,100 units, +/-...

Question:

Precise Machinery is analyzing a proposed project. The company expects to sell 2,100 units, {eq}\pm {/eq}5%. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a {eq}\pm {/eq}4% range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit,{eq}\pm {/eq}2%. The tax rate is 35%. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $755.

What is the operating cash flow based on this analysis?

Operating cash flow

Operating cash flow refers to the cash flow provided by the operations of the company. It is calculated to analyze whether the company is generating enough cash flows to work in the future or the operations need to be revived.

Answer and Explanation:

{eq}\begin{align*} \rm\text{Operating cash flow} &= \left( \rm\text{Sale price} - \rm\text{Variable cost} \right) \times\rm\text{ Quantity} -\rm\text{ Fixed cost } \times \left( 1 - \rm\text{Tax rate} \right) + \left( \rm\text{Depreciation expense} \times \rm\text{Tax rate} \right)\\ &= \left( \$ 755 - \$ 260 \right)2100 - \$ 589,000 \times \left( 1 - 0.35 \right) + \left( \$ 129,00 \times 0.35 \right)\\ &= \$ 337,975 \end{align*} {/eq}


Learn more about this topic:

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Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4
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