Consider a four-year project with the following information: initial fixed asset investment = $ 440,000 straight-line depreciation to zero over the four-year life zero salvage value price: $ 25 variable costs: $ 15 fixed costs: $ 130,000 quantity sold: 73,000 units tax rate: 35 percent How sensitive is OCF to changes in quantity sold?

OCF is increased by 1.11% with 1% increase in sales.

The fixed asset of $440,000 will be depreciated in 4 years

• Depreciation per year = $440,000 / 4 = $110,000
• Quantity Sold = 73,000
• Sales = 73,000 * $25
• Variable Costs = 73,000 * $15
• Fixed Costs = $130,000
• Gross Profit = Sales - Total Costs = $600,000
• Depreciation = $110,000
• Operating profit = $600,000 - $110,000 = $490,000
• interest = $0
• Tax rate = 35%
• Net Income = $490,000 * (1 - 0.35) = $318,500

Now, Depreciation is a non cash expense

So, Operating Cash Flow per year = $318,500 + $110,000 = $428,500

If quantity sold is increased by 1%(73,730)

• Operating profit = $497,300
• Net income = $323,245
• Operating Cash flow per year = $323,245 + $110,000 = $433,245

% change in Operating cash flow = 1.11%

So, OCF is increased by 1.11% with a 1% increase in sales.