Question

International Paper is considering a new product launch. The project will cost $630,000, have a 5-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per year, price per unit will be $24,000, variable cost per unit will be $12,000, and fixed costs will be $283,000 per year. The relevant tax rate is 35 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±9 percent. What is the worst case operating cash flow?

Answer #1

Worst Case: | |||||

Selling price = 24000 | |||||

VC per unit = 12000+9% = 13080 | |||||

Sales Qty = 160 -9% = 146 | |||||

Fixed cost = 283000+9% = 308470 | |||||

CM per unitt= 24000-13080 =10920 | |||||

Annual Operating cashflows | |||||

Total Contribution (146*10920) | 1594320 | ||||

Less: Fixed cost | 308470 | ||||

Less: Depreciation | 126000 | ||||

(630000/5) | |||||

Net Income before tax | 1159850 | ||||

Less: Tax @ 35% | 405947.5 | ||||

After tax Income | 753902.5 | ||||

Add: Depreciation | 126000 | ||||

Annual cashflows | 879902.5 |

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