Question

You are evaluating a project that costs $530,000, has a five-year life, and has no salvage
value. Assume that depreciation is straight-line to zero over the life of the project. Sales
are projected at 50,000 units per year. Price per unit is $42, variable cost per unit is $22,
and fixed costs are $650,000 per year. The tax rate is 30 percent, and you require a 12
percent return on this project.

A) Calculate the accounting break-even point.

B) Calculate the base-case cash flow and NPV

C) Calculate the cash flow and NPV if the sales are projected at 72,000 units

Answer 1

A)

Accounting break even = fixed costs / contribution

contribution = sale price - variable cost

= 42 - 22

= 20

Accounting break even = 650,000 / 20 = 32500

B)

Depreciation = 530,000 / 5 = 106,000

NPV = sum of present value of future cash flows - initial cash outflow

C)

when sales are 72,000 units