Question

Jed's Cars, Inc., just purchased a $450,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its six-year economic life. Each toy sells for $27. The variable cost per toy is $12, and the firm incurs fixed costs of $277,000 each year. The corporate tax rate for the company is 23 percent. The appropriate discount rate is 11 percent. What is the financial break-even point for the project?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

The financial breakeven point is computed as follows:

EAC of investment will be as shown below:

= Purchase cost / Present value annuity factor of 11% of 6 years

Present value annuity factor of 11% of 6 years is computed as follows:

= [ (1 – 1 / (1 + r)ⁿ) / r ]

= [ (1 - 1 / (1 + 0.11)⁶ ) / 0.11 ]

= 4.230537854

So, the EAC will be as follows:

= $ 450,000 / 4.230537854

= $ 106,369.4536

So, the units will be as follows:

= [ EAC + Fixed cost x (1 - tax rate) - (Depreciation x tax rate) ] / [ (Selling price - variable cost) x (1 - tax rate) ]

= [ $ 106,369.4536 + $ 277,000 x (1 - 0.23) - ( ($ 450,000 / 6) x 0.23) ] / [ ($ 27 - $ 12) x (1 - 0.23) ]

= [ $ 106,369.4536 + $ 213,290 - $ 17,250 ] / $ 11.55

= $ 302,409.4536 / $ 11.55

= 26,182.64 units Approximately