with explanation please! Shane\'s Toys, Inc., just purchased a $284,000 machine
ID: 2633318 • Letter: W
Question
with explanation please!
Shane's Toys, Inc., just purchased a $284,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its four-year economic life. Each toy sells for $23. The variable cost per toy is $10, and the firm incurs fixed costs of $273,000 each year. The corporate tax rate for the company is 40 percent. The appropriate discount rate is 10 percent. What is the financial break-even point point for the project? (Do not round intermediate calculations and round your final answer to nearest whole number (e.g., 32).) Break-even point unitsExplanation / Answer
Annual Cash Flow = (Contribution Margin*No of Unit to be sold - Fixed Cost) *(1-tax rate) + Annual Depreciation * Tax rate
Fixed Cost = 273000
Contribution Margin = Sell Price - Variable Cost
Contribution Margin = 23-10
Contribution Margin = 13
Annual Depreciation = 284000/4 = 71000
At break Even point NPV = 0
Annual Cash Flow *PVIFA(rate,nper) = 284000
Annual Cash Flow*PVIFA(10%,4) = 284000
Annual Cash Flow*3.169865 = 284000
Annual Cash Flow = 284000/3.169865
Annual Cash Flow = $ 89,593.72
Annual Cash Flow = (Contribution Margin*Annual No of Unit to be sold - Fixed Cost) *(1-tax rate) + Annual Depreciation * Tax rate
89593.72 = (13*Annual No of Unit to be sold - 273000)*(1-40%) + 71000*40%
(89593.72 - 28400)/60% = 13*Annual No of Unit to be sold - 273000
13*Annual No of Unit to be sold = 101989.53+ 273000
Annual No of Unit to be sold = 374989.53/13
Annual No of Unit to be sold = 28845.35
Break Even Point = 28845.35*4
Break Even Point = 115,381 Units
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