Question

Consider a 9-year project with the following information: initial fixed asset investment = $430,000; straight-line depreciation to zero over the 9-year life; zero salvage value; price = $32; variable costs = $17; fixed costs = $167,700; quantity sold = 98,943 units; tax rate = 33 percent. How sensitive is OCF to changes in quantity sold?

Answer #1

Initial Investment | $430,000.00 | ||

Selling Price | $32.00 | ||

Variable Cost | $17.00 | ||

Fixed Cost | $167,700.00 | ||

Quantity Sold | 98943 | units | |

Tax Rate | 33.00% | ||

Depreciation = $430,000/9 | $47,777.78 | ||

OCF = ((SP-VC) x Q -FC) x (1-T) + (T x D) | |||

OCF = ((32-17) x 98943 -167,700) x (1-33%) + (33% x $47,777.78) | $897,784.82 | ||

NPV=-Initial Outlay + OCF (PVIFA10%, 9) + Salvage value | |||

NPV=- 430000 + 897784.82 (PVIFA10%, 9) + 0 | $4,740,364.14 | ||

Quantity Sold | OCF | NPV | |

Base Case | 98,943 | $897,784.82 | $4,740,364.14 |

Optimistic + 10% | 108,837 | 987,563 | $5,257,400.56 |

Pessimistic - 10% | 89,049 | 808,006 | $4,223,327.73 |

Sensitivity = ?OCF/?Q = ($897,784 - $987,563)/(98943-108,837) | 9.07 | ||

Sensitivity = ?NPV/?Q = ($4740364 - $5257400)/(98943-108,837) | $52.26 | ||

For every additional unit sold, OCF goes up by $9.07 and NPV by $52.26 | |||

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rev: 09_18_2012
$634,932.00
$71,720.00
$68,134.00
$75,306.00
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