10 00 peints Problem 11-25 Break-Even and Taxes [LO3] Wettway Sailboat Corporati

Question

10 00 peints Problem 11-25 Break-Even and Taxes [LO3] 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.) Cash break -even P nancial break evern References eBook & Resources

Explanation / Answer

Cash Break-even point = FC / (P - VC) = 800,000 / (40,000 - 20,000) = 40 units

Accounting break-even point = (FC + Depreciation) / (P - VC) = (800,000 + 3,000,000/5) / (40,000 - 20,000) = 70 units

Financial break-even is the no. of units at which the NPV of the project is zero. In this case, financial break-even units = 88.73

Sailboat 0 1 2 3 4 5 Investment -3,000,000 Sales 3,549,200 3,549,200 3,549,200 3,549,200 3,549,200 VC -1,774,600 -1,774,600 -1,774,600 -1,774,600 -1,774,600 FC -800,000 -800,000 -800,000 -800,000 -800,000 Depreciation -600,000 -600,000 -600,000 -600,000 -600,000 EBT 374,600 374,600 374,600 374,600 374,600 Tax (38%) -142,348 -142,348 -142,348 -142,348 -142,348 Net Income 232,252 232,252 232,252 232,252 232,252 Cash Flows -3,000,000 832,252 832,252 832,252 832,252 832,252 NPV $82.20

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