Question

Company C is analyzing a new type of insulation for interior walls. Management has compiled the...

Company C is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.5 million, which would be depreciated straight-line to zero over the 10-year life of the project. Projected fixed costs are $889,000 and the anticipated annual operating cash flow is $340,000. What is the degree of operating leverage for this project? Show your work.

Homework Answers

Answer #1

Projected Fixed Costs = $889,000

Depreciation = $15, 00,000/10= $1, 50,000

Annual Operating Cash Flow = $3, 40,000

Annual Operating Cash Flow = Net Income + Depreciation

So, Net Income = Annual Operating Cash Flow – Depreciation

Or, Net Income = $3, 40,000 - $1, 50, 000 = $1, 90, 000

Contribution = Fixed Costs + Profit (net income)

Or, Contribution = $889, 000 + $190,000 = $10, 79, 000

Degree of Operating Leverage = Contribution Margin/ Operating Margin

Operating Margin = Net Income + Depreciation + Fixed Costs

Or, Operating Margin = $190, 000 + $150, 000 + $889, 000

Operating Margin = $12, 29,000

So, Degree of Operating Leverage = $10, 79, 000/ $12, 29, 000 = 0.88

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Quad Enterprises is considering a new 3yr expansion project that requires an initial fixed asset investment...
Quad Enterprises is considering a new 3yr expansion project that requires an initial fixed asset investment of $2.4 million. The fixed asset will be depreciated straight-line to zero over its 3yr life after which it will be worthless. The project is estimated to generate $2,550,000 in annual sales, with operating costs of $1,180,000, not including depreciation cost. If the tax rate is 35%, what is the annual operating cash flow for this project?
Grace P. has compiled this information related to a new project: Initial investment: $1,550,000; Fixed costs:...
Grace P. has compiled this information related to a new project: Initial investment: $1,550,000; Fixed costs: $420,000; Variable costs: $8.10 per unit; Selling price: $28.80 per unit; Discount rate: 14 percent; Project life: 6 years; Tax rate: 25 percent. Fixed assets are depreciated using straight-line depreciation over the project's life. What is the financial break-even point? 38,522 39,211 40,286 41,804 42,374
Grace P. has compiled this information related to a new project: Initial investment: $1,550,000; Fixed costs:...
Grace P. has compiled this information related to a new project: Initial investment: $1,550,000; Fixed costs: $420,000; Variable costs: $8.10 per unit; Selling price: $28.80 per unit; Discount rate: 14 percent; Project life: 6 years; Tax rate: 25 percent. Fixed assets are depreciated using straight-line depreciation over the project's life. What is the financial break-even point? 38,522 39,211 40,286 41,804 42,374
You are considering a new five-year project that requires an initial fixed asset investment of $5...
You are considering a new five-year project that requires an initial fixed asset investment of $5 million. The fixed asset will be depreciated straight-line to zero over its five-year tax life, after which time it will be worthless. The project is estimated to generate $4.5 million in annual sales, with costs of $2 million. Assume the tax rate is 30 percent and the required return on the project is 15 percent. What is the operating cash flow of the project?...
You are considering a new five-year project that requires an initial fixed asset investment of $5...
You are considering a new five-year project that requires an initial fixed asset investment of $5 million. The fixed asset will be depreciated straight-line to zero over its five-year tax life, after which time it will be worthless. The project is estimated to generate $4.5 million in annual sales, with costs of $2 million. Assume the tax rate is 30 percent and the required return on the project is 15 percent. What is the operating cash flow of the project?...
A project has an initial requirement of $177685 for new equipment and $9227 for net working...
A project has an initial requirement of $177685 for new equipment and $9227 for net working capital. The installation costs are expected to be $12515. The fixed assets will be depreciated to a zero book value over the 4-year life of the project and have an estimated salvage value of $135789. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $98459 and the cost of capital is 7%...
Pappy's Potato has come up with a new product, the Potato Pet that they are considering...
Pappy's Potato has come up with a new product, the Potato Pet that they are considering launching. The company has determined they will need a fixed asset investment at the beginning of the project of $260,000. This asset will last for four years which is the life of the project. Also, they will need to have more net working capital (NWC) of which they have estmated an amount of $16,500 for this purpose. The NWC will be recovered when the...
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment...
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.1 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,150,000 in annual sales, with costs of $1,140,000.The project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $175,000 at the end of...
Quad Enterprises is considering a new three year expansion project that requires an initial fixed asset...
Quad Enterprises is considering a new three year expansion project that requires an initial fixed asset investment of $2.29 million. The fixed asset will be depreciated straight-line to zero over its three year tax life. The project is estimated to generate $1,790,000 in annual sales, with the costs of $700,000. The project requires an initial investment in net working capital of $410,000, and the fixed asset will have a market value of $420,000 at the end of the project. A.)...
Avis Company is analyzing a proposed 3-year project using standard sensitivity analysis. The company expects to...
Avis Company is analyzing a proposed 3-year project using standard sensitivity analysis. The company expects to sell 15,000 units, ±4 percent. The expected variable cost per unit is $11 and the expected fixed costs are $58,000. 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 $150,000 for equipment that will be depreciated using the straight-line method to...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT