Question

Suppose we are evaluating Project X that costs $1,160,000, has a life of 10 years, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 44,000 units per year. Price per unit is $45, variable cost per unit is $20, and fixed costs are $645,000 per year. The tax rate is 24 percent and we require a return of 13 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±15 percent. What is the best case OCF in Year 1?

Group of answer choices:

A) $919,676

B) $947,516

C) $716,780

Answer 1

Sol) Correct answer = A) $919,676

Because,

As we are taking best case it means our quanting and price will increase whereas cost will decrease

	Year 0	Year 1 (best case)
Sales (Qty)	44000	50600
Selling price	45	51.75
Sales ($)	1980000	2618550
Variable cost(p.u.)	20	17
-Variable cost	880000	860200
Contribution	1100000	1758350
-Fixed exp	645000	548250
Operating income before tax	455000	1210100
-Tax @ 24%	109,200	290,424
OCF	345,800	919,676