Consider a 3-year project with the following information: initial fixed asset investment = $770,000; straight-line depreciation to zero over the 3-year life; zero salvage value; price = $34.99; variable costs = $23.16; fixed costs = $245,000; quantity sold = 94,500 units; tax rate = 35 percent. How sensitive is OCF to an increase of one unit in the quantity sold?

Question

Quizplus · Accepted Answer

The sensitivity of OCF (Operating Cash Flow) to an increase in quantity sold is the contribution margin per unit, which is calculated as the price per unit minus the variable cost per unit, adjusted for taxes. The contribution margin is $34.99 - $23.16 = $11.83. After tax, it is $11.83 * (1 - 0.35) = $7.69.

Consider a 3-Year Project with the Following Information: Initial Fixed