Precise Machinery is analyzing a proposed project. The company expects to sell 7,500 units, ±10 percent. The expected variable cost per unit is $314 and the expected fixed costs are $647,000. Cost estimates are considered accurate within a ±4 percent range. The depreciation expense is $187,000. The sales price is estimated at $849 per unit, give or take 2 percent. The tax rate is 21 percent. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $850. What is the operating cash flow based on this analysis?
A) $2,703,940
B) $2,293,089
C) $1,986,675
D) $2,354,874
E) $2,284,837

Question

Quizplus · Accepted Answer

The operating cash flow is calculated using the formula: OCF = (Sales - Variable Costs - Fixed Costs - Depreciation) * (1 - Tax Rate) + Depreciation. With a sales price of $850, the sales revenue is 7,500 units * $850 = $6,375,000. Variable costs are 7,500 units * $314 = $2,355,000. Fixed costs are $647,000, and depreciation is $187,000. The taxable income is $6,375,000 - $2,355,000 - $647,000 - $187,000 = $3,186,000. After taxes, the net income is $3,186,000 * (1 - 0.21) = $2,517,540. Adding back depreciation, the OCF is $2,517,540 + $187,000 = $2,704,540, which is closest to $2,703,940.

Precise Machinery Is Analyzing a Proposed Project