Consider a four-year project with the following information: initial fixed asset

Question

Consider a four-year project with the following information: initial fixed asset investment = $490,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $34; variable costs = $24; fixed costs = $190,000; quantity sold = 79,000 units; tax rate = 34 percent.

What is the degree of operating leverage at the given level of output? (Round your answer to 4 decimal places. (e.g., 32.1616))

What is the degree of operating leverage at the accounting break-even level of output? (Round your answer to 4 decimal places. (e.g., 32.1616))

Consider a four-year project with the following information: initial fixed asset investment = $490,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $34; variable costs = $24; fixed costs = $190,000; quantity sold = 79,000 units; tax rate = 34 percent.

Explanation / Answer

Depreciation expense = (Cost of the asset - Salvage value) / Useful life

= ($490,000 - $0) / 4

= $122,500

OCF = [(P-v)Q - FC] (1-Tc) + Tc (D)

OCF= [($34 - $24) * 79,000 - $190,000] (1 - 0.34) + 0.34 ($122,500)= 437650

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