# Budgeting sensitivity scenario- Finance Capital Budgeting

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```					              Sub: Finance                                                                     Topic: Capital Budgeting

Question:
Computation of EBIT and Sensitivity Analysis

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The Can-Do Co. is analyzing a proposed project. The company expects to sell 12,000 units, give
or take 4%. The expected variable cost per unit is \$7 and the expected fixed cost is \$36,000. The
fixed and variable cost estimates are considered accurate within a plus or minus 6% range. The
depreciation expense is \$30,000. The tax rate is 34%. The sale price is estimated at \$14 a unit,
give or take 5%. The company bases its sensitivity analysis on the expected case scenario.

a. What is earnings before interest and taxes (EBIT) under the expected case scenario?

b. What is EBIT under the optimistic case scenario?

c. What is the operating cash flow for a sensitivity analysis using total fixed costs of

\$32,000?

Solution:

Tax Rate                                        34%

Depreciation Expenses                      \$30,000

No of Units                                   12000

Give 4%                                       12480

Take 4%                                       11520

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Sub: Finance                                                                     Topic: Capital Budgeting

Variable cost per unit                         \$7.00

Plus 6%                                        \$7.42

Minus 6%                                       \$6.58

Fixed Cost                                 \$36,000

Plus 6%                                    \$38,160

Minus 6%                                   \$33,840

Selling Price                                \$14.00

Give 5%                                      \$14.70

Take 5%                                      \$13.30

a)

Expected Case Scenario:

No of Units                                                     12000

Selling Price                                                  \$14.00

Variable cost per unit                                           \$7.00

Contribution per unit                                            \$7.00

Total Contribution
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Description: Computation of EBIT and Sensitivity Analysis : What are earnings before interest and taxes (EBIT) under the expected case scenario?
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