Question
In: Finance
A project has the following estimated data: price = $54 per unit; variable costs = $28.08...
|
A project has the following estimated data: price = $54 per unit; variable costs = $28.08 per unit; fixed costs = $6,600; required return = 11 percent; initial investment = $10,000; life = three years. Ignore the effect of taxes. |
| a. What is the accounting break-even quantity? |
| b. What is the cash break-even quantity? |
| c. What is the financial break-even quantity? |
|
d. What is the degree of operating leverage at the financial break-even level of output? |
Solutions
Expert Solution
Ignoring the effect of taxes
Depreciation - Assuming straight line Depreciation
Depreciation each year D = $10000/3 = $3333.33
a) Accounting BreakEven Quantity= (Fixed cost + Depreciation) / (Price -Variable cost)
=(6600+3333.33)/(54-28.08) = 383.23 or 384 units
b) Cash breakeven quantity = Fixed cost/(Price -Variable cost)
=6600/(54-28.08) = 254.6296 or 255 units
c) Financial Break even occurs when the NPV = 0
Let X units be the Financial Break even quantity
Cashflow each year
= (54-28.08)*X - 6600 (as there are no taxes depreciation does not affect Cashflows)
For Financial breakeven
NPV = -10000 + ((54-28.08)*X - 6600)/0.11*(1-1/1.11^3) = 0
=> ((54-28.08)*X - 6600)* 2.443715 = 10000
=> (54-28.08)*X = 4092.131+6600
=> X =10692.13/25.92 = 412.505 or 413 units
d) Degree of Operating leverage
= (Price - Variable costs)*X / ((Price-Variable Cost)*X -Fixed Cost)
=(54-28.08)*413/((54-28.08)*413-6600)
=2.6078
jeff jeffy answered 1 year agoRelated Solutions
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