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 = $34.30 Variable costs per abalone = $5.40 Fixed costs per year = $368,000 Depreciation per year = $113,000 Tax rate = 34% The discount rate for the company is 13 percent, the initial investment in equipment is $678,000, 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

Explanation / Answer

Accounting break-even = (FC + Depreciation) / (Price - VC) = (368,000 + 113,000) / (34.3 - 5.4) = 16,644 units

Financial break-even point is the unit sales at which the NPV of the project is zero.

We get at unit sales = 19,611.2, NPV = 0. Hence, financial break-even point = 19,611

Abalone 0 1 2 3 4 5 6 Investment -678000 Sales 672664.16 672664.2 672664.2 672664.2 672664.2 672664.2 VC -105900.5 -105900 -105900 -105900 -105900 -105900 FC -368000 -368000 -368000 -368000 -368000 -368000 Depreciation -113000 -113000 -113000 -113000 -113000 -113000 EBT 85763.68 85763.68 85763.68 85763.68 85763.68 85763.68 Tax (34%) -29159.65 -29159.7 -29159.7 -29159.7 -29159.7 -29159.7 Net Income 56604.029 56604.03 56604.03 56604.03 56604.03 56604.03 Cash Flows -678000 169604.03 169604 169604 169604 169604 169604 NPV $0.55

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