10. Financial Break-Even Niko has purchased a brand new machine to produce its H

Question

10. Financial Break-Even Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of five years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $575,000. The sales price per pair of shoes is $50, while the variable cost is $14. $195,000 of fixed costs per year are attributed to the machine. Assume that the corporate tax rate is 34 percent and the appropriate discount rate is 8 percent. What is the financial break-even point? Use problem on excel file

Explanation / Answer

Note there are 2 excl sheets explaining no of units for breakeven 9832.17

A B C D E F Year 0 1 2 3 4 5 1 Initial Investment on new machine 575,000 2 Sales price per pair 50 50 50 50 50 3 Variable cost 14 14 14 14 14 4 Contribution Margin= Sales price/pair - variable cost 36 36 36 36 36 5 No of Units 0 0 0 0 6 Contribution = Contribution margin * no of units 7 Fixed Cost 195000 195000 195000 195000 195000 8 Depreciation 115000 115000 115000 115000 115000 (Depreciation =( Initial Investment -0)/5 9 EBT= Contribution-Fixed Costs-Depreciation -310000 -310000 -310000 -310000 -310000 10 Tax = EBT * Tax Rate -105400 -105400 -105400 -105400 -105400 11 EAT=EBT-Taxes -204600 -204600 -204600 -204600 -204600 12 Depreciation 115000 115000 115000 115000 115000 13 Free Cash Flow 575,000 -89600 -89600 -89600 -89600 -89600 Free Cash flow =EAT + Depreciation 14 Discount rate 8% 15 Financial Breakeven =NPV =0 -932746.82 NPV(A14,B13:F13) (Initially Keeping no of units as blank)Then we will use goal seek function of excel in next table by going to excel >data>what if analysis>goal seek. Now using goal seek Converting NPV from -932746.82 to 0 by converting the blanks in no of units row which is done in following table)

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