Question

Daily Enterprises is purchasing a $10,000,000 machine. The machine will be depreciated using straight-line depreciation over its 8 year life and will have no salvage value. The machine will generate revenues of $7,500,000 per year along with fixed costs of $3,500,000 per year.

If Daily's marginal tax rate is 31%, what will be the cash flow in each of years 1 to 8 (the cash flow will be the same each year)?

Enter your answer rounded to the nearest whole number. (3147500)

If the discount rate is 12%, what is the NPV of the project? The cash flow each year is $3,147,500.

Enter your answer rounded to the nearest whole number. (5635646)

Question: Find the Net Present value Break-even level of revenues, assuming the costs are all fixed costs. Enter your answer rounded to the nearest whole number.   

the answer is 5,855,838. How can I get this answer?

Answer 1

Cash flows for the year 1 to 8 :

Sales	Cost	Depn	PBT	Tax	PAT	Depreciation	Cash Flow
7500000	3500000	1250000	2750000	852500	1897500	1250000	3147500

NPV of the project

Year	CF	PVF@12%	Disc CF
0	$       -1,00,00,000	1	$       -1,00,00,000
1	$           31,47,500	0.8929	$           28,10,268
2	$           31,47,500	0.7972	$           25,09,168
3	$           31,47,500	0.7118	$           22,40,328
4	$           31,47,500	0.6355	$           20,00,293
5	$           31,47,500	0.5674	$           17,85,976
6	$           31,47,500	0.5066	$           15,94,621
7	$           31,47,500	0.4523	$           14,23,769
8	$           31,47,500	0.4039	$           12,71,222
NPV	$           56,35,646

NPV break even level of revenues

Let X be the revenues

Sales	Cost	Depreciation	PBT	PAT	Depreciation	Cash Flow
X	3500000	1250000	X-4750000	0.69X-3277500	1250000	0.69X-2027500

12%, 8 year annuity factor

(0.69X-2027500) * 4.96763977 = Initial Investment

(0.69X-2027500) * 4.96763977 = 10000000

0.69X-2027500 = 10000000 / 4.96763977

0.69X-2027500 = 2013028

0.69X = 2013028 + 2027500

0.69X = 4040528

X = 4040528 / 0.69

X= 5855838

Therefore Net Present value Break-even level of revenues = 5855838

Pls do rate, if the answer is correct and comment, if any further assistance is required.