A project has the following estimated data: price = $48 per unit; variable costs

Question

A project has the following estimated data: price = $48 per unit; variable costs = $32 per unit; fixed costs = $20,500; required return = 8 percent; initial investment = $36,000; life = six years

What is the financial break-even quantity? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the degree of operating leverage at the financial break-even level of output? (Round your answer to 3 decimal places. (e.g., 32.161))

A project has the following estimated data: price = $48 per unit; variable costs = $32 per unit; fixed costs = $20,500; required return = 8 percent; initial investment = $36,000; life = six years

Explanation / Answer

1)Break even quantity = (Fixed cost +Operating cash flow) /(Price- Variable cost)

                                 =(20500+36000) /(48-32 )

                                = 56500/16

                                = 3531.25 units

Operating cash flow is a situation of 0NpV so when Intital investment equals to Operatin cash flow , NPV=0

2)Degree of operating leverage = 1+ (20500 /7787.32)

                                           = 1+2.632

                                          = 3.632

**36000/4.6229 =7787.32

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