You are considering investing in a company that cultivates abalone for sale to l

Question

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $35.50 Variable costs per abalone = $6.60 Fixed costs per year = $380,000 Depreciation per year = $125,000 Tax rate = 34% The discount rate for the company is 13 percent, the initial investment in equipment is $750,000, and the project’s economic life is six years. Assume the equipment is depreciated on a straight-line basis over the project’s life.

What is the accounting break-even level for the project?

What is the financial break-even level for the project?

What is the financial break-even level for the project?

Explanation / Answer

Calculate the financial break – even level for the project:

Break -even point (in units) = Sales price – Variable cost

=$ 35.50 - $6.60

= $28.90

Therefore, break- even point per unit is $28.90

Break -even point = Fixed cost / Contribution per unit

= $380,000 / $28.90

= 13,148.79 units

Break- even point (in dollars) = 13,148.79 units * $35.50

= $466,782.05

Therefore, Break – even point is $466,782.05

Calculate the accounting break -even level / NPV for the project:

Depreciation = $750,000 /6 years = $125,000

Break -even point = (fixed cost + depreciation) / (Contribution per unit)

= $380,000 + $125,000 / $28.90

= 17,474.05 units

Break – even point in dollars is = 17,474.05 units * $35.50 = $620,328.78.

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