value: 10.00 points You are considering investing in a company that cultivates a
ID: 2779614 • Letter: V
Question
value: 10.00 points You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalo Variable costs per abalone Fixed costs per year Depreciation per year Tax rate = $35.20 = $6.30 = $377,000 $122,000 = 34% The discount rate for the company is 13 percent, the initial investment in equipment is $732,000, and the project's economic life is six years. Assume the equipment is depreciated on a straight-line basis over the project's life a. What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Accounting break-even level units b. What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Financial break-even level units References eBook & ResourceExplanation / Answer
a)At accounting breakeven Units =Fixed cost /contribution per unit
contribution per unit =price- variable cost
= 35.2-6.3=28.9
Fixed cost = 377000+122000=499000
Accounting breakeven = 499000/28.9 = 17266 units
b)Let the number of units be x .
Net income before tax : [contribution *unit sold]-fixed cost
= 28.9x - 499000
Net income after tax = Net income before tax [1-Tax]
= [28.9x-499000][1-.34]
= [28.9x-499000]*.66
= 19.074 x- 329340
Annual cash flow :Net income after tax +depreciation(non cash)
= 19.074x -329340+122000
= 19.074x - 207340
At financial break even ,Present value of annual cash flow equals initial cost which equals 732000 (no profit no loss situation)
Present value of cash flow =PVA13%,6* Annual cash flow
732000 = 3.99755*[19.074x-207340]
= 76.24927 x - 828852.02
732000+828852.02 = 76.24927x
x = 1560852.02/76.24927
= 20470 units
Financial breakeven units = 20470 units
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