A project has the following estimated data: price-$74 per unit, variable costs $

Question

A project has the following estimated data: price-$74 per unit, variable costs $47 per unit, fixed costs $22,500; required return 8 percent; initial investment-$24,000; life-three years. gnoring the effect of taxes, what is the accounting break-even quantity? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Break-even quantity What is the cash break-even quantity? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.] Break-even quantity What is the financial break-even quantity? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Break-even quantity What is the degree of operating leverage at the financial break-even level of output? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.) DOL

Explanation / Answer

Answer a) The accounting breakeven for the project is:

QA= [$22500 + ($24,000/3)]/($74 – 47) =1129.63

Answer b)

The cash breakeven is:QC= $22500/($74 – 47) =833.33

Answer c)

At the financial breakeven, the project will have a zero NPV. Since this is true, the initial costof the project must be equal to the PV of the cash flows of the project. Using this relationship,we can find the OCF of the project must be:

NPV = 0$24,000 = OCF(PVIFA8%,4)OCF = $9312.80

Using this OCF, we can find the financial breakeven is:

QF= ($22,500 + 9312.80)/($74 – 47) =1178.252

Answer d)

The DOL of the project is:

DOL = 1 + ($22500/$9312.80) = 3.416028

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