You are considering investing in a compnay thtat cultivates tuna for sale to loc

Question

You are considering investing in a compnay thtat cultivates tuna for sale to local restaurants. Use the following information:

Sales price per tuna = $    88.00

Variable costs per tuna      =   $            5.60

Fixed costs per year           =   $660,000.00    

Depreciation per year         = $ 53,000.00

Tax pate                                 =                     39%

The discount rate for the company is 11 percent, the initial investment in equipment is $371,000, and the project's economic life is seven years. Assume the equipment is depreciated on a straight-line basis over the project's life.

A. What is the accounting break-even level for the project? Accounting break-even _______ units.

B. What is the financial break-even level for the project? Financial break-even _______ units.

Explanation / Answer

The annuity factor for 11% at 7 years is 4,7122. So the project must generate 371,000/4.7122= 78,731.80 in yearly cash flow to break even.

So if x is the number of units to break even we have

(82.40x -660,000-53,000)*(1-.39) +53,000= 78,731.80

Solving for x we get 9164.84 or 9165 units.

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