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A 9-year project is expected to generate annual sales of 8700 units at a price of...

A 9-year project is expected to generate annual sales of 8700 units at a price of $74 per unit and a variable cost of $45 per unit. The equipment necessary for the project will cost $301,000 and will be depreciated on a straight-line basis over the life of the project. Fixed costs are $180,000 per year and the tax rate is 35 percent. How sensitive is the operating cash flow to a $1 change in the per unit sales price?

A. $3759

B. $5655

C. $5090

D. $3315

E. $4202

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Answer #1
Particulars
Selling Price p.u. 74 75
Sales Revenue 643800 652500
Less: Variable cost p.u 45 45
Less: Variable costs 391500 391500
Less: Fixed Costs 180000 180000
Less: Depreciation 33444.44 33444.44
Profit before tax 38855.56 47555.56
Less: Tax @ 35% 13599.44 16644.44
Profit after tax 25256.11 30911.11
Add: Depreciation 33444.44 33444.44
Operating Cashflow 58700.56 64355.56

So sensitivity = operating cashflow @ selling price of Rs 74 - operating cashflow @ selling price of Rs 75

sensitivity = $64355.56-$58700.56 = $5655 i.e option B

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