Question

Arvin's is analyzing a project with an initial cost of $212,000 that would be depreciated straight-line to zero over the project’s 3-year life. Estimates include fixed costs of $48,280, variable costs per unit of $13.12, and a selling price of $26.50 per unit. The discount rate is set at 16 percent with a tax rate of 35 percent. What is the financial breakeven point?

Multiple Choice

11,618 units

13,067 units

10,749 units

11,199 units

10,117 units

Answer 1

At financial break even point NPV is $0.

Answer is 11618

Particulars	Amount
Units sold	11618
Sales	$           307,877
Less: variable costs	$           152,428
Contribution	$           155,449
Less: rent lost	$            (48,280)
Incremental cash flows	$           107,169

Ref	Particulars		Year 1	Year 2	Year 3
a	Operating cash flow		$        107,168.84	$            107,168.84	$     107,168.84
	Salvage value				$                      -
b	Depreciation		$        (70,666.67)	$             (70,666.67)	$      (70,666.67)
c=a-b	Profit before tax		$          36,502.17	$               36,502.17	$        36,502.17
	Profit after tax		$          23,726.41	$               23,726.41	$        23,726.41
	Add depreciation		$          70,666.67	$               70,666.67	$        70,666.67
	Add: working capital		$                        -	$                             -	$                      -
	Free cash flow		$          94,393.08	$               94,393.08	$        94,393.08
d	Present value factor@ 16.0%		0.862068966	0.743162901	0.640657674
e=c*d	Present value of annual cashflows		$          81,373.34	$               70,149.43	$        60,473.65
	Total present value of annual cash inflows		$        211,996.43
	Investment:
	Equipment		$      (212,000.00)
	Working capital		$                        -
	NPV		$                  (3.57)

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