Question

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 zero over the project's life. The equipment can be sold for $40,000 at the end of the project. The project requires $16,800 in net working capital for the three years. The discount rate is 10 percent and tax rate is 25 percent. What is the operating cash flow under the optimistic case scenario? $44,009 $47,182 $50,638 $54,210 $57,755

Answer 1

Sales	$         278,460	=15000*(1+4%)*17*(1+5%)
Less:
Costs	$         218,120	=15000*(1+4%)*11*(1-5%)+58000*(1-5%)
Depreciation	$           50,000	=150000/3
EBT	$           10,340
Less: Tax payable @ 25%	$             2,585
Incremental earnings	$               7,755
Add: Depreciation	$           50,000
Operating cash flow	$      57,755