Question

Stellar Plastics is analyzing a proposed project. The company expects to sell 12,000 units, give or take 3 percent. The expected variable cost per unit is $7.00 and the expected fixed cost is $35,000. The fixed and variable cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $32,000. The tax rate is 34 percent. The sale price is estimated at $15.00 a unit, give or take 3 percent. What is the operating cash flow for a sensitivity analysis using total fixed costs of $32,000?

Answer 1

Calculation of operating cash flow is shown below
Sales	$180,000	12000*15
Less: Variable costs	$84,000	12000*7
Less: Fixed costs	$32,000
Less: Depreciation expense	$32,000
Income before tax	$32,000
Less: Tax @ 34%	$10,880
Net income	$21,120
Add: Depreciation	$32,000
Operating cash flow	$53,120
The depreciation is a non cash expense and therefore is added back after considering the tax shield on depreciation to reflect free cash flow
The operating cash flow is $53,120