Hilton Company has the following information related to a new project: Initial investment: $1,510,000; Fixed costs:...

Hilton Company has the following information related to a new project: Initial investment: $1,510,000; Fixed costs: $502,000; Variable costs: $12.60 per unit; Selling price: $34.70 per unit; Discount rate: 12 percent; Project life: 5 years; Tax rate: 25 percent. Fixed assets are depreciated using straight-line depreciation over the project's life. What is the financial break-even point?

Expert Solution

Depreciation = Initial Investment / Life
Depreciation = $1,510,000 / 5
Depreciation = $302,000

Contribution Margin per unit = Price per unit - Variable Cost per unit
Contribution Margin per unit = $34.70 - $12.60
Contribution Margin per unit = $22.10

Operating Cash Flows = Initial Investment / PVA of $1 (Required Return, Life)
Operating Cash Flows = $1,510,000 / PVA of $1 (12%, 5)
Operating Cash Flows = $1,510,000 / 3.604776
Operating Cash Flows = $418,888.7187

Operating Cash Flows = [Financial Breakeven Quantity * Contribution Margin per unit - Fixed Costs] * (1 - Tax Rate) + Tax Rate * Depreciation
$418,888.7187 = [Financial Breakeven Quantity * $22.10 - $502,000] * (1 - 0.25) + 0.25 * $302,000
$418,888.7187 = [Financial Breakeven Quantity * $22.10 - $502,000] * 0.75 + $75,500
$343,388.7187 = [Financial Breakeven Quantity * $22.10 - $502,000] * 0.75
$457,851.6249 = Financial Breakeven Quantity * $22.10 - $502,000
$959,851.6249 = Financial Breakeven Quantity * $22.10
Financial Breakeven Quantity = 43,432 units

jeff jeffy answered 1 year ago

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