If you are the manager of a project that has a degree of operating leverage of 1.84 and a required return of 15 percent. Due to the current state of the economy, you expect unit sales to decrease by 3.5 percent next year. The change you should expect in the operating cash flows next year given your sales prediction is: 6.44 percent decrease
Using this formula
Percentage change in operating cash flows=Degree of operating leverage×
(-Expected decrease in unit sales)
Where:
Degree of operating leverage=1.84
Expected decrease in unit sales=-3.4%
Let plug in the formula
Percentage change in operating cash flows=1.84× (-3.5%)
Percentage change in operating cash flows=-6.44%
Inconclusion if you are the manager of a project that has a degree of operating leverage of 1.84 and a required return of 15 percent. Due to the current state of the economy, you expect unit sales to decrease by 3.5 percent next year. The change you should expect in the operating cash flows next year given your sales prediction is: 6.44 percent decrease
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