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Homework answers / question archive / The Company is considering a project with estimated annual unit sales of 180,000; price per unit of $42; variable costs per unit of $12; and fixed costs of $380,000
The Company is considering a project with estimated annual unit sales of 180,000; price per unit of $42; variable costs per unit of $12; and fixed costs of $380,000. The firm expects that the true values for unit sales, price per unit, variable costs per unit, and fixed costs will be within plus or minus 20% of these estimates. The project requires a fixed asset investment of $2,000,000 that will be depreciated straight-line to zero over the project’s 5 year life. The firm’s discount rate is 10% and the tax rate is 30%. Calculate the worst case OCF?
| Time line | 0 | 1 | |
| Cost of new machine | -2000000 | ||
| =Initial Investment outlay | -2000000 | ||
| Unit sales | 144000 | ||
| Profits | =no. of units sold * (sales price - variable cost) | 2764800 | |
| Fixed cost | -456000 | ||
| -Depreciation | Cost of equipment/no. of years | -400000 | |
| =Pretax cash flows | 1908800 | ||
| -taxes | =(Pretax cash flows)*(1-tax) | 1336160 | |
| +Depreciation | 400000 | ||
| =after tax operating cash flow | 1736160 |
