Question

Your firm is considering a project to produce new whatchamacallits. The project will require new equipment at a cost of $150,000. Shipping and installation will be $25,000 and initial training required before the project starts will cost $20,000. The equipment will be depreciated on a straight- line basis to a book value of $15,000 over the project’s three year life. At the end of the project, the equipment will be sold for $10,000.

Initially, the project requires an increase in inventory of $5,000, an increase in Accounts Payable of $3,000, and an increase in Accounts Receivable of $8,000. Changes in working capital will be recouped at the end of the project.

The whatchamacallits will be sold for $10 each. The project would require variable costs of 20% of sales, annual fixed costs of $21,000, and annual recertification training at a cost of $5,000.

The tax rate is 35% and the cost of capital is 12%. Assuming that the operating cash flows will be constant over the project’s life, calculate the financial break-even level of annual sales.

Answer 1