Air Ltd Has Operating Costs Equal to 40% of Sales

Multiple Choice

Air Ltd. has operating costs equal to 40% of sales. Air Ltd. is forecasting two scenarios. Scenario 1 is that operating costs will rise 10% but taxes will decrease 10%. Scenario 2 is that operating costs will decrease by 10% and taxes will increase 10%. Which scenario would have the biggest impact on free cash flow?

A) Scenario 1, which will increase cash flows by 2.1%.
B) Scenario 2, which will increase cash flows by 2.7%.
C) Scenario 1, which will decrease cash flows by 2.1%.
D) Scenario 2, which will decrease cash flows by 2.7%.
E) Both scenarios will impact free cash flows equally.