Niko has purchased a brand new machine to produce its High Flight line of shoes.

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 $590,000. The sales price per pair of shoes is $60, while the variable cost is $14. $168,000 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?

Explanation / Answer

There are 5 years with st. line depreciation, so , 590000/5=$118000 per year

Fixed cost is $168000

Sales price-variable cost = contribution margin => 60-14=$46

Assume that breakeven point is x, then( x*46-(118000+168000))*(1-0.34) is yearly income

Discounting income per year by8% gives an NPV

x can be obtained using excel solver and = 6218 units

Income to cover fixed cost + dep = 46*6218 =286028

Gross income =286028+168000+118000=28

Profit after tax =28*(1-.34)=18.48

Discount factor = 1/(1+8%)^1+…..1/(1+8%)^5 =.925926+….+.680583

NPV =Profit after tax*discount factor for each period =$73.78528

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