Ayden's Toys, Inc., just purchased a $474,000 machine to produce toy cars. The machine will be...

Ayden's Toys, Inc., just purchased a $474,000 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 $281,000 each year. The corporate tax rate for the company is 35 percent. The appropriate discount rate is 11 percent. What is the financial break-even point for the project?

Expert Solution

Time line		0	1	2	3	4	5	6
Project cost		-474000
+Increase in working capital		0
=Initial Investment outlay		-474000

Sales	No. of units*(selling price - variable cost)		473511.8	473511.8	473511.8	473511.8	473511.8	473511.8
-Fixed cost			-281000	-281000	-281000	-281000	-281000	-281000
-Depreciation	(cost of equipment and plant)/6		-79000	-79000	-79000	-79000	-79000	-79000
=			113511.8	113511.8	113511.8	113511.8	113511.8	113511.8
-taxes	=(net sales - fixed cost - depreciation)*(1-tax)		73782.69	73782.69	73782.69	73782.69	73782.69	73782.69
+Depreciation			79000	79000	79000	79000	79000	79000
=after tax operating cash flow			152782.7	152782.7	152782.7	152782.7	152782.7	152782.7

Reversal of Increase in working capital						0	0	0
= Terminal year after tax non operating CF						0	0	0

Total Cash flow		-474000	152782.7	152782.7	152782.7	152782.7	152782.7	152782.7
Cost of capital = 11%
Discount factor =	(1 + cost of capital) ^ corresponding period	1	1.11	1.2321	1.367631	1.51807	1.685058	1.870415
Discounted cashflow =	total cash flow/discount factor	-474000	137642.1	124001.9	111713.4	100642.7	90669.09	81683.87
NPV=	Sum of discounted cash flow =	0

Where no. of units sold each year (sales for financial break even) = 31567.46

jeff jeffy answered 2 years ago

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