A project has the following estimated data: price = $99 per unit; variable costs

Question

A project has the following estimated data: price = $99 per unit; variable costs = $42.57 per unit; fixed costs = $6,400; required return = 15 percent; initial investment = $6,000; life = seven years. Ignore the effect of taxes and use straight line depreciation to zero.

What is the accounting break-even quantity, the cash break-even quantity, the financial break-even quantity ( NOTE: You first need to calculate the Operating Cash Flow that gives an NPV = 0. Don't forget that here we are ignoring taxes (so assume the marginal tax rate is zero) and the degree of operating leverage at the financial break-even level of output?

Explanation / Answer

You would need to sell 220 units in order to cover your fixed costs

Units Sold Sales Revenues Variable Costs Fixed Costs Operating Profit 0 $0 $0 $12,400 $-12,400 54 5,439 2,339 12,400 -9,300 109 10,877 4,677 12,400 -6,200 164 16,316 7,016 12,400 -3,100 219 21,754 9,354 12,400 -0 274 27,193 11,693 12,400 3,100 329 32,632 14,032 12,400 6,200 384 38,070 16,370 12,400 9,300 439 43,509 18,709 12,400 12,400 494 48,947 21,047 12,400 15,500

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