Wettway Sailboat Corporation is considering whether to launch its new Margo-clas
ID: 2792137 • Letter: W
Question
Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $40,000 per boat. The variable costs will be about half that, or $20,000 per boat, and fixed costs will be $800,000 per year.
The Base Case: The total investment needed to undertake the project is $3,000,000. This amount will be depreciated straight-line to zero over the five-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Wettway has a 12 percent required return on new projects.
Use the above expression to find cash, accounting and financial break-even points for Wettway Sailboat. Assume a tax rate of 38 percent. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $40,000 per boat. The variable costs will be about half that, or $20,000 per boat, and fixed costs will be $800,000 per year.
The Base Case: The total investment needed to undertake the project is $3,000,000. This amount will be depreciated straight-line to zero over the five-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Wettway has a 12 percent required return on new projects.
Q= FC+UGH-IExplanation / Answer
Ans. Calculation of Cash Break even point
P/v Ratio =50%
Fixed Cost= $800000
Cash break even point = 800000/.50 =$1600000
2. Calculation of Accounting break Even point
Annual Depreciation Exp. = $3000000/5 =$600000
Fixed cost amt $800000
Total Fixed cost (600000+800000)= 1400000
Fixed cost after tax =1400000(1-.38) = 868000
Accounting break even point = 868000/.50 = 1736000
3. Calculation of Financial break even = 1400000/.50 = 2800000
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