Wettway Sailboat Corporation is considering whether to launch its new Margo-clas

Question

Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $44,000 per boat. The variable costs will be $24,000 per boat, and fixed costs will be $800,000 per year.

The Base Case: The total investment needed to undertake the project is $3,200,000. This amount will be depreciated straight-line to zero over the five-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Wettway has a 10 percent required return on new projects.

Use the above expression to find cash, accounting and financial break-even points for Wettway Sailboat. Assume tax rate of 38 percent. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $44,000 per boat. The variable costs will be $24,000 per boat, and fixed costs will be $800,000 per year.

The Base Case: The total investment needed to undertake the project is $3,200,000. This amount will be depreciated straight-line to zero over the five-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Wettway has a 10 percent required return on new projects.

Explanation / Answer

Answer:

1.Cash BEP= Fixed costs (cash expenses) /Selling price per unit - variable cost per unit

= 800000 / (44000-24000) = 40 Units

BEP in $ = 40 * 44000 = $1760000

2.Accounting BEP = Fixed costs (All) /Selling price per unit- variable costs per unit

Depreciation = 3200000/5 Years = 640000

All fixed costs = 800000 + 640000 = 1440000

Hence Accounting BEP = 1440000 / (44000-24000) = 72 Units

BEP in $ = 72 * 44000 = $3168000

3. Financial Break even Point means the point at which NPV of the project is ZERO

It means Present value of cash inflow =   Present value of cash outflow

Calculation of Present value of cash inflow assuming sales units be X

Contribution net of tax =X*(44000-24000)*(1-0.38) = 12400 X

Less: Fixed cost net of tax = 800000* (1-0.38) =496000

Add: Tax Saving on depreciation = 640000*38% = 243200

cash inflow = 12400 X -252800

PVAF (10%, 5 Years) =3.79079

Hence PV of cash inflow = 3.79079 * (12400 X -252800)

Now placing PV of cash inflow = PV of cash outflows

3.79079 * (12400 X -252800) = 3200000

(12400 X -252800) = 3200000 /3.79079

(12400 X -252800) = 844151.20

X = (844151.20 +252800) /12400

Hence X= 88 Units

BEP in $ = 88 * 44000 = $3872000

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