Otobai Co. is considering investing in a project. The following table shows the expected values...

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Finance

Otobai Co. is considering investing in a project. The following table shows the expected values of the relevant variables of the project. For simplicity, lets assume that all the numbers are in US dollars. Discount rate r = 10%.

A new minimum wage law is likely to pass. If so, the variable costs will increase by 10%. Everything else remains unchanged. What would be the annual cash flow from Year 1 through Year 10?

A 10% increase in oil price is likely to increase Otobais fixed costs by 20%. Everything else remains unchanged. What would be the annual cash flow from Year 1 through Year 10?

Year 0 Year 1 - 10 -15 Investment Sales Variable costs Fixed coss Depreciation Pretax profit Taxes at 50% Profit after tax Operating cash flows Net cash flow 37.5 30 3 1.5 3 1.5 1.5 3.0 3.0 -15

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To calculate the annual cash flow from Year 1 through Year 10 under the two scenarios 10 increase in variable costs and 20 increase in fixed costs we need to adjust the relevant figures accordingly Original Cash Flows Year 110 1 Sales 375 2 Variable Costs 30 3 See Answer

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