Consider a project with the following data: accounting break-even quantity = 5,5

Question

Consider a project with the following data: accounting break-even quantity = 5,500 units; cash break-even quantity = 5,000 units; life = six years; fixed costs = $170,000; variable costs = $26 per unit; required return = 8 percent. Ignoring the effect of taxes, find the financial break-even quantity. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Consider a project with the following data: accounting break-even quantity = 5,500 units; cash break-even quantity = 5,000 units; life = six years; fixed costs = $170,000; variable costs = $26 per unit; required return = 8 percent. Ignoring the effect of taxes, find the financial break-even quantity. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Selling Price Per unit = fixed costs/Accounting break-even quantity + variable costs

Selling Price Per unit = 170000/5500 + 26

Selling Price Per unit = $ 56.9090

Depreciation = (56.9090-26)*(5500-5000)

Depreciation = $ 15454.55

Initial investment = 15454.55*6 = $ 92,727.27

Annual Cash flow = Initial investment /PVIFA(8%,6)

Annual Cash flow = 92727.27/4.622880

Annual Cash flow = $ 20058.34

Financial Break Even Point = (20058.34+170000-15454.55)/(60-26)

Financial Break Even Point = 5648.95 Units

Answer

Break-even quantity = 5648.95

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