You are considering investing in a company that cultivates abalone for sale to l
ID: 2565145 • Letter: Y
Question
You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $35.50 Variable costs per abalone = $6.60 Fixed costs per year = $380,000 Depreciation per year = $125,000 Tax rate = 34% The discount rate for the company is 13 percent, the initial investment in equipment is $750,000, 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
1)Accounting Breakeven: Fixed cost /contribution per unit
= 505000/28.9
= 17474 units
Fixed cost: 380000+125000= 505000
Contribution per unit :Price-variable cost
= 35.5-6.6
= 28.9
2)At Financial breakeven ,The present value of Future benefit equals initial investment.Let the financial quantity be "X"
**Net income After tax: [Units sold(price-variable cost)-Fixed cost][1-Tax]
=[x(35.5-6.6)-505000][1-.34]
= [28.9x-505000]*.66
= 19.074x - 333300
Cash flow =Net income after tax+ depreciation
= 19.074x-333300+ 125000
= 19.074x - 208300
Present value of cash flow =PVA13%,6*cash flow
= 3.99755*[19.074x-208300]
= 76.24927 x - 832689.665
At bereakeven Initial cost equal presentvalue
750000= 76.24927x-832689.665
750000+832689.665 = 76.24927x
x = 1582689.665/76.24927
= 20,757 units
financial breakeven units :20757 units
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