Question 1: Break Even Problem(30 points) A firm initiates a 4 year project with
ID: 2756431 • Letter: Q
Question
Question 1: Break Even Problem(30 points)
A firm initiates a 4 year project with an investment of $50,000. Assume that this initial investment is depreciated using the straight line method. There is no salvage value at the end of the project. Under this project a certain product is produced and sold. Key financial information is provided below:
Price/unit
10
Direct Expenses/unit
2
SGA (excl. Depreciation)
7,500
Taxes
30%
What is the NI break-even?
What is the NPV break-even? Assume that r = 9%.
Is the NI BE conservative or aggressive compared to the NPV BE? Why? (1-2 sentences)
Price/unit
10
Direct Expenses/unit
2
SGA (excl. Depreciation)
7,500
Taxes
30%
Explanation / Answer
Price per unit 10 Direct expenses 2 Contribution margin per unit 8 80% Depreciation 12,500 50000/4 SGA 7,500 NI Break Even= (Fixed cost+Depreciation)/ contribution per unit $25,000 (7500+12500)/80% Year 0 1 2 3 4 cashflow -50000 Net income 30,250 30,250 30,250 30,250 Variable cost 6,050 6,050 6,050 6,050 Contribution 24,200 24,200 24,200 24,200 Depreciation 12,500 12,500 12,500 12,500 SGA 7,500 7,500 7,500 7,500 Net profit 4,200 4,200 4,200 4,200 Tax 1,260 1,260 1,260 1,260 Profit after tax 2,940 2,940 2,940 2,940 ADD: Deprecation 12,500 12,500 12,500 12,500 Cashflow 15,440 15,440 15,440 15,440 PV interest factor -9% 0.91743 0.84167 0.77218 0.70842 PV cashflow (50,000.00) 14,165.12 12,995.38 11,922.46 10,938.00 NPV 21 NPV break even = $ 30250 NI BE is conservative when compared to NPV BE because it coniders only the net income and not discounted cashflows.
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