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Consider a 5-year project with an initial fixed asset investment of $324,000, straight-line depreciation to zero over the project's life, a zero salvage value, a selling price of $34, variable costs of $17, fixed costs of $189,700, a sales quantity of 94,000 units, and a tax rate of 21 percent.What is the sensitivity of OCF to changes in the sales price

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Answer:

$74,260 per $1 of sales

Explanation:

Calculation to determine the sensitivity of OCF to changes in the sales price

First step is to calculate the OCF

OCF = [($34 −17) (94,000) −$189,700] (1 −.21) + ($324,000/5) (.21)

OCF = $1,126,165

Second step is to determine OCF by using the sales price amount of $35

OCF = [($35 −17) (94,000) −$189,700](1 −.21) + ($324,000/5) (.21)

OCF = $1,200,425

Now let determine the Sensitivity of OCF

Sensitivity of OCF = ($1,200,425 −1,126,165)/($35 −34)

Sensitivity of OCF = $74,260

Therefore the sensitivity of OCF to changes in the sales price will be $74,260

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