Company uses straight-line depreciation method

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Reference no: EM13814658

Consider the following project which costs $1,000,000 with a salvage value of $50,000 in 5 years. The project will produce a new type of running shoes which will be sold for $235 and have variable costs of $95 per pair. The company has fixed costs of $1,500,000 and a required return on projects of 12.5%. The company uses straight-line depreciation method. Suppose the firm sells 15,000 pairs of shoes. Ignoring the effects of taxes, what will happen to OCF if unit sales increase by 20%?

a. OCF will increase by 50%

b. OCF will increase by 20%

c. OCF will increase by 70%

d. OCF will decrease by 20%

e. OCF will decrease by 70%

Reference no: EM13814658

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