A project currently generates sales of $10 million, variable costs equal 50% of sales, and fixed costs are $2 million. The firms tax rate is 21%. Assume all sales and expenses are cash items.

What are the effects on cash flow, if sales increase from $10 million to $11 million?

What are the effects on cash flow, if variable costs increase to 65% of sales?

(a). cash flow is increased by $395,000. (b)Cash flow is decreased by $1,185,000. these are not the correct answer!