Problem:

You are the manager of a project that has a 2.8 degree of operating leverage and a required return of 14 percent. Due to the current state of the economy, you expect sales to decrease by 7 percent next year.

Required:

Question: What change should you expect in the operating cash flows next year given your sales prediction?

• 19.60 percent decrease
• 16.03 percent decrease
• 13.46 percent decrease
• 5.60 percent decrease
• 2.74 percent decrease

Note: Provide support for your rationale.