This problem concerns the effect of taxes on the various break-even measures. Co

Question

This problem concerns the effect of taxes on the various break-even measures. Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $6,000,000 investment in threading equipment to get the project started; the project will last for six years. The accounting department estimates that annual fixed costs will be $700,000 and that variable costs should be $200 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the six-year project life. It also estimates a salvage value of $680,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $300 per ton. The engineering department estimates you will need an initial net working capital investment of $580,000. You require a return of 18 percent and face a marginal tax rate of 30 percent on this project. Calculate the accounting, cash, and financial break-even amounts. (Do not round intermediate calculations and round your final answers to the nearest whole number, e.g., 32.)

Explanation / Answer

Accounting Break-even point = (Fixed Cost + Depreciation) / (Price - VC)

= (700,000 + 6,000,000 / 6) / (300 - 200)

= 17,000

Cash break-even point = Fixed Cost / (Price - VC) = 700,000 / (300 - 200) = 7,000

Financial Break-even point is the level of sales at which the NPV of the project is zero. We get financial break-even at 27,992.11 units

0 1 2 3 4 5 6 Investment -6000000 NWC -580000 580000 Salvage 680000 Sales 8397633 8397633 8397633 8397633 8397633 8397633 VC -5598422 -5598422 -5598422 -5598422 -5598422 -5598422 FC -700000 -700000 -700000 -700000 -700000 -700000 Depreciation -1000000 -1000000 -1000000 -1000000 -1000000 -1000000 EBT 1099211 1099211 1099211 1099211 1099211 1099211 Tax (30%) -329763.3 -329763.3 -329763.3 -329763.3 -329763.3 -329763.3 Net Income 769447.7 769447.7 769447.7 769447.7 769447.7 769447.7 Cash Flows -6580000 1769447.7 1769447.7 1769447.7 1769447.7 1769447.7 2825447.7 NPV $0.51

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