BE1 A company is considering a 5-year project that opens a new product line and

Question

BE1

A company is considering a 5-year project that opens a new product line and requires an initial outlay of $77,000. The assumed selling price is $97 per unit, and the variable cost is $61 per unit. Fixed costs not including depreciation are $21,000 per year. Assume depreciation is calculated using stright-line down to zero salvage value. If the required rate of return is 10% per year, what is the accounting break-even point? (Answer to the nearest whole unit.)

BE3

A company is considering a 5-year project that opens a new product line and requires an initial outlay of $80,000. The assumed selling price is $91 per unit, and the variable cost is $59 per unit. Fixed costs not including depreciation are $15,000 per year. Assume depreciation is calculated using stright-line down to zero salvage value. If the required rate of return is 13% per year, what is the financial break-even point? (Answer to the nearest whole unit.)

Explanation / Answer

                                                      = $21,000+[ $77,000/5]/97-61

                                                    = $21,000+$15400/ 36

                                                    = 1011 Units

          Present value of outflow = Present value of outflow

         Suppose Breakeven point of unit = X

          Initial outflow = [Breakeven unit*contribution – fixed cost ] ** PVIFA(I,N)

         80,000 = [X*(91-59)-15000] * PVIFA(13%,5year)

         80000 = [32X – 15000]*3.517231

         80000 = 112.55X - 52758.47

                 X = 1180 Units

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