Question

Black System is analyzing a proposed 3-year project using standard sensitivity analysis. The company expects to sell 12,000 units, ±5 percent. The expected variable cost per unit is $7 and the expected fixed costs are $28,000. The fixed and variable cost estimates are considered accurate within a ±5 percent range. The sales price is estimated at $16 a unit, ±4 percent. The project requires an initial investment of $153,000 for equipment that will be depreciated using the straight-line method to zero over the project's life. The equipment can be sold for $29,000 at the end of the project. The project requires $14,000 in net working capital up front. The discount rate is 14 percent and tax rate is 25 percent. What is the operating cash flow in year 2 under the optimistic case scenario?

		$84,006.19
		$87,205.50
		$91,354.88
		$95,418.60
		$98,744.15

Answer 1

Under the optimistic scenario, every variable will be in our favour. Sales will be higher and costs will be lower.

Sales units = 12000 + 5% = 12600

Selling price = $16 + 4% = $16.64

Variable cost = $7 - 5% = $6.65

Fixed cost = $28000 - 5% = $26600

Operating Cash Flow in year 2

Sales (12600 x 16.64)	209664
Less: Variable costs (12600 x 6.65)	83790
Less: Fixed costs	26600
Less: Depreciation (153000 / 3)	51000
Earnings before tax	48274
Less: Tax @25%	12068.50
Net Income	36205.50
Add: Depreciation	51000
Operating cash flow	87205.50