Consider a three-year project with the following information: initial fixed asset investment = $347,600; straight-line depreciation to zero over the three-year life; zero salvage value; price per unit = $49.99; variable costs per unit = $30.82; fixed costs per year = $187,000; quantity sold per year = 65,500 units; tax rate = 35 percent.How sensitive is OCF to an increase of one unit in the quantity sold?

Question

Quizplus · Accepted Answer

The operating cash flow (OCF) is sensitive to changes in quantity sold by the contribution margin per unit after tax. The contribution margin per unit is the price per unit minus the variable cost per unit. The after-tax contribution margin is then multiplied by (1 - tax rate). Calculation: ($49.99 - $30.82) * (1 - 0.35) = $12.46.

Consider a Three-Year Project with the Following Information: Initial Fixed