When considering taxes, the relationship between operating cash flow, OCF, and sales volume, Q, can be written as:=+1If we consider the effect of taxes the degree of operating leverage can be written as: =1+[(1)(]/Other variables we use are in Chapter 10 and Chapter 10 Slides.Consider a project to supply Sports Car Co. with 30,000 tons of screws annually for vehicle production. You will need an initial $4.3 million investment in equipment to get the project started; the project will last for five years. Annual fixed costs are estimated to be $1.025 million and variable costs should be $190 per ton; the accounting department will depreciate the initial fixed asset investment straight-line to zero over the five-year project life. They also estimate a salvage value of $400,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $290 per ton. The engineering department estimates you will need an initial net working capital investment of $410,000. You require a return of 13 percent and face a tax rate of 22% percent on this project. (AMT 22%)

c. Suppose youre confident about your own projections, but youre a little unsure about Sports Car Co.s actual screw requirement. What is the sensitivity of the project OCF to changes in the quantity supplied? What about the sensitivity of NPV to changes in quantity supplied? Choose a quantity of 31,000 and calculate Op Cash Flow and NPV. Then calculate change in NPV at 31000-30000 divided by change in quantity. Given the sensitivity number you calculated, is there a minimum level of output you wouldnt want to operate below? Why? (You wouldnt want to operate at a NPV less than 0)

d. Find the accounting, cash, and financial break-even quantities for Sports Car Co. For Cash Breakeven, you need to solve for the quantity where the OCF is 0. Set the tax shield equation to 0.

e. Find the degree of operating leverage for Sports Car Co. at the base-case output level of 30,000 tons. How does this number compare to the sensitivity figure you found in Part C? Verify that either approach will give you the same OCF figure at any new quantity level.