onsider a four-year project with the following information: initial fixed asset investment = $570,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $30; variable costs = $22; fixed costs = $210,000; quantity sold = 87,000 units; tax rate = 32 percent.


How sensitive is OCF to changes in quantity sold?

To determine how sensitive the Operating Cash Flow (OCF) is to changes in quantity sold, we need to calculate the OCF for different quantities sold and observe the changes in OCF.

Here are the steps:

1. Calculate the revenue for the project based on the price and quantity sold:
Revenue = Price x Quantity Sold

In this case, the price is $30 and the quantity sold is 87,000 units.
Revenue = $30 x 87,000 = $2,610,000

2. Calculate the variable costs per unit and the total variable costs:
Variable Costs per Unit = $22
Total Variable Costs = Variable Costs per Unit x Quantity Sold

Using the given information, the variable costs per unit is $22.
Total Variable Costs = $22 x 87,000 = $1,914,000

3. Calculate the fixed costs:
Fixed Costs = $210,000 (given)

4. Calculate the Earnings Before Tax (EBT):
EBT = Revenue - Total Variable Costs - Fixed Costs

EBT = $2,610,000 - $1,914,000 - $210,000 = $486,000

5. Calculate the taxes:
Taxes = EBT x Tax Rate

Given that the tax rate is 32 percent:
Taxes = $486,000 x 0.32 = $155,520

6. Calculate the Operating Cash Flow (OCF):
OCF = EBT - Taxes

OCF = $486,000 - $155,520 = $330,480

Now, to assess the sensitivity of OCF to changes in quantity sold, you can perform the above calculations again for different quantities sold. By comparing the OCF for each quantity, you can determine how sensitive OCF is to changes in quantity sold.