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