Niko has purchased a brand new machine to produce its High Flight line of shoes.
ID: 2692613 • Letter: N
Question
Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of five years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $390,000. The sales price per pair of shoes is $60, while the variable cost is $14. $185,000 of fixed costs per year are attributed to the machine. Assume that the corporate tax rate is 34 percent and the appropriate discount rate is 8 percent.
What is the financial break-even point? (Round your answer to the nearest whole number. (e.g., 32))
Required:What is the financial break-even point? (Round your answer to the nearest whole number. (e.g., 32))
Explanation / Answer
PVIFA8%,5years=[1-(1+r)-n/r]=[1-1.08-5]/0.08=3.9927
EAC = Initial Investment / PVIFA8%,5years
EAC = $390,000 / 3.9927
EAC=$97,678
The annual depreciation is the cost of the equipment divided by the economic life
annual depreciation=390,000/5=$78,000
The financial breakeven point for this project is:
QF = [EAC + FC(1 – tC) – Depreciation(tC)] / [(P – VC)(1 – tC)]
QF=[97,678+185,000(1-0.34)-78000*0.34]/(60-14)(1-0.34)
QF=6365.55
QF=6366 Units
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