Calculate the operating cash flow, Financial Accounting

You are evaluating a project which costs $720,000, has a four-year life, and no salvage value. Depreciation is straight-line and the half year rule does not apply. Sales are projected at 190 units per year; price per unit will be $21,000, variable cost per unit will be $15,000 and fixed costs will be $225,000 per year. Based on your experience, you believe the unit sales, variable cost and the fixed cost projections given here are probably accurate to within ± 10 percent. The required return on the project is 15 percent and the tax rate is 35 percent.

(a) Calculate the operating cash flow (OCF) and net present value (NPV) for the base-case, best-case and worst-case scenarios. 

(b)  Suppose that the probability of the base-case scenario is twice the probability of either the worst-case scenario or the best-case scenario. Should the project be accepted? Why? 

(c) How sensitive is the base-case NPV to changes in fixed costs? Illustrate your answer assuming that fixed costs increase from $225,000 to $230,000. 

(d)  What is the base-case accounting break-even sales level for this project.

(e)  Calculate the degree of operating leverage (DOL) for the base-case scenario. How do you interpret this number?

Posted Date: 2/19/2013 2:39:24 AM | Location : United States







Related Discussions:- Calculate the operating cash flow, Assignment Help, Ask Question on Calculate the operating cash flow, Get Answer, Expert's Help, Calculate the operating cash flow Discussions

Write discussion on Calculate the operating cash flow
Your posts are moderated
Related Questions
Q. What is Lifetime Learning Credit? Lifetime Learning Credit - This allows a credit for 20 percent of qualified tuition and fees paid by taxpayer with respect to one or more s

tyoes of assets

Q. What do you mean by Inflation? Predicts of future inflation of sales prices and variable costs should be prepared Therefore that a nominal NPV evaluation is able to be under

How is a company’s cost of capital affected by its tax rate?

Charlie Brown, controller for the Kelly Corporation, is preparing the company's income statement at year-end. He notes that the company lost a considerable sum on the sale of some

Ace Company has a 30 percent marginal tax rate and uses a 12% discount rate to compute NPV. The firm started a venture that will yield the following before-tax cash flows: year 0,

1.  The average annual investment cost of a workstation in New Jersey has been calculated to be $100,000.  It has been calculated to be $150,000 in Kentucky.  The hourly cost at a

Shareholder value maximization framework The four key elements that affect the shareholder value of a company are Profitability Growth Risk Capital Mark


How to determine the market economy Within a market economy there are strong competitive forces at work which ensure that failure to enhance owners' wealth won't be tolerated f