Question

In: Finance

A project requires an initial investment of $1,000,000 and is depreciated straight-line to zero salvage over...

  1. A project requires an initial investment of $1,000,000 and is depreciated straight-line to zero salvage over its 10-year life. The project produces items that sell for $1,000 each, with variable costs of $700 per unit. Fixed costs are $350,000 per year. What is the accounting break-even quantity and financial break-even quantity (assume 10% as discount rate)? I'm not too sure how to go about this question. Any help?

Solutions

Expert Solution

Depreciation = Initial Investment / Life
Depreciation = $1,000,000 / 10
Depreciation = $100,000

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $1,000 - $700
Contribution Margin per unit = $300

Answer A.

Accounting Breakeven Quantity = (Fixed Costs + Depreciation) / Contribution Margin per unit
Accounting Breakeven Quantity = ($350,000 + $100,000) / $300
Accounting Breakeven Quantity = $450,000 / $300
Accounting Breakeven Quantity = 1,500 units

Answer B.

Operating Cash Flows = Initial Investment / PVA of $1 (Required Return, Life)
Operating Cash Flows = $1,000,000 / PVA of $1 (10%, 10)
Operating Cash Flows = $1,000,000 / 6.144567
Operating Cash Flows = $162,745.40

Financial Breakeven Quantity = (Fixed Costs + Operating Cash Flows) / Contribution Margin per unit
Financial Breakeven Quantity = ($350,000 + $162,745.40) / $300
Financial Breakeven Quantity = $512,745.40 / $300
Financial Breakeven Quantity = 1,709.15 or 1,709 units


Related Solutions

A project requires an initial investment of $1,000,000 and is depreciated straight-line to zero salvage over...
A project requires an initial investment of $1,000,000 and is depreciated straight-line to zero salvage over its 10-year life. The project produces items that sell for $1,000 each, with variable costs of $700 per unit. Fixed costs are $350,000 per year.  What is the accounting break-even quantity? o Q = (FC + D)/(P – v)  What is the operating cash flow at accounting break-even? o OCF= [PQ - vQ – FC – D] + D  What is...
A project requires an initial investment of $1,000,000 and is depreciated straight-line to zero salvage over...
A project requires an initial investment of $1,000,000 and is depreciated straight-line to zero salvage over its 10-year life. The project produces items that sell for $1,000 each, with variable costs of $700 per unit. Fixed costs are $350,000 per year. What is the financial break-even quantity assuming 10% as discount rate?
A project requires an initial investment of $1,000,000 and is depreciated straight-line to zero salvage over...
A project requires an initial investment of $1,000,000 and is depreciated straight-line to zero salvage over its 10-year life. The project produces items that sell for $1,000 each, with variable costs of $700 per unit. Fixed costs are $350,000 per year. 1) What is the accounting break-even quantity? What is theoperating cash flow at accounting break-even? What is degree of operating leverage (DOL) at that output level?And what does the DOL indicate? 2) What is the cash flow break-even quantity?...
A project requires an initial investment of $500,000 depreciated straight-line to $0 in 10 years. The...
A project requires an initial investment of $500,000 depreciated straight-line to $0 in 10 years. The investment is expected to generate annual sales of $400,000 with annual costs of $120,000 for 10 years. Assume a tax rate of 35% and a discount rate of 12%. What is the NPV of the project?
A project requires an initial investment of $320,000 depreciated straight-line to $0 in 24 years. The...
A project requires an initial investment of $320,000 depreciated straight-line to $0 in 24 years. The investment is expected to generate annual sales of $90,000 with annual costs of $45,000 for 30 years. Assume a tax rate of 30% and a discount rate of 20%. What is the NPV of the project?
A proposed project requires an initial investment in fixed asset of $1,200,000 and is depreciated straight-line...
A proposed project requires an initial investment in fixed asset of $1,200,000 and is depreciated straight-line to zero over its 3-year life. The project is expected to generate sales of $1,500,000 per year. It has annual fixed costs of $200,000 and annual variable costs of $400,000. The required rate of return on the project is 20 percent. The relevant tax rate is 25 percent. At the end of the project (i.e., year 3) the asset can be sold for $500,000...
A project requires an initial investment of $2,400,000 depreciated straight-line to $0 in 10 years. The...
A project requires an initial investment of $2,400,000 depreciated straight-line to $0 in 10 years. The investment is expected to generate annual sales of $700,000 with annual costs of $450,000 for 20 years. Assume a tax rate of 30% and a discount rate of 10%. What is the NPV of the project? No excel spreadsheet please.
A new product requires an initial investment of $3.5 million and will be depreciated to an expected salvage of zero over 7 years.
A new product requires an initial investment of $3.5 million and will be depreciated to an expected salvage of zero over 7 years. The price of the new product is expected to be $35,000, and the variable cost per unit is $27,000. The fixed cost is $1.5 million. Assume that discount rate is 15%. Calculate accounting, cash, and financial break-evens.
A three-year project will cost $150,000 to construct. This will be depreciated straight-line to zero over...
A three-year project will cost $150,000 to construct. This will be depreciated straight-line to zero over the three-year life. The project is expected to generate sales of $450,000 per year. It has annual variables costs of $200,000 and annual fixed costs of $100,000 per year. The appropriate tax rate is 25 percent and the required rate of return on the project is 16 percent. Assume that a salvage company will pay $60,000 (before taxes) for the assets at the end...
A three-year project will cost $150,000 to construct. This will be depreciated straight line to zero...
A three-year project will cost $150,000 to construct. This will be depreciated straight line to zero over the three-year life. The project is expected to generate sales of $450,000 per year. It has annual variables costs of $200,000 and annual fixed costs of $100,000 per year. The appropriate tax rate is 25 percent and the required rate of return on the project is 16 percent. Assume that a salvage company will pay $60,000 (before taxes) for the assets at the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT