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 = $35.80 Variable costs per abalone = $6.90 Fixed costs per year = $383,000 Depreciation per year = $128,000 Tax rate = 34% The discount rate for the company is 13 percent, the initial investment in equipment is $768,000, and the project’s economic life is six years. Assume the equipment is depreciated on a straight-line basis over the project’s life.

a. What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Accounting break-even level units

b. What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Financial break-even level units

Explanation / Answer

a.

Calculate the accounting break-even level for the project and Accounting break-even level units:

Break event point (in units) = Fixed cost / Contribution per unit

= $383,000 + $128,000 / ($35.80 - $6.90)

= $511,000 / $28.90

= 17,682 units

Break event point (in value) = 17,682 units * $35.80

= $633,016

Therefore, as per accounting break even in units are 17,682.

b.

Calculate the Financial break-even level for the project and Accounting break-even level units:

N = 6 year, PV = $768,000, I/Y = 13%, CPT PMT ($768,000 /3.99755) = $192,118 =OCF

Quantity = ($383,000 + $192,118) / ($35.80 - $6.90)

= $575,118 / $28.90

= 19,900 units

Therefore, as per financial break even in units are 19,900.

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