You are considering investing in a company that cultivates abalone for sale to l

Question

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $80 Variable cost per abalone = $5.40 Fixed cost per year = $750,000 Depreciation per year = $51,429 Tax Rate = 35% The discount rate for the company is 15 percent, the initial investment in equipment is $360,000, and the project's economic life is 7 years. Assume the equipment is depreciated on a straight-line basis over the project's life ($51,429 per year). What is the Financial Break-Even level for the project? Do not use a comma in your numerical answer.

Explanation / Answer

Let Accounting breakeven be X units:

Sales = 80X

Variable Cost = $5.40 X

At Accounting Breakeven, Sales –Variable Cost = Fixed cost + Depreciation

Hence, 80X-5.4X = $750,000+$51,429

X = $801,429/74.60 = 10,743.02 units

Therefore, we get our accounting breakeven quantity as 10,743.02 units.

Lets now try to find out the financial breakeven units.

Financial Break Even Point = (EAC+Fixed Cost x(1-t)-Depreciation*tc)/((salesprice-variable cost))*1(1-t)

EAC (Equivalent Annuity Cost) = Initial Investment/Annuity factor at discounting rate = $360000/4.1604 = $86,529.73

Financial Breakeven point = (($86,529.73+$750000*(1-.35)-$51,429(0.35))/(80-5.4)*(1-.35)

Financial Breakeven Point = 11,467 units

For any clarification feel free to ask and clarify

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