Question

The Mini-Max Company has the following cost information on its new prospective project: Initial investment: $700 Fixed costs are $ 200 per year Variable costs: $ 3 per unit Depreciation: $ 140 per year Price: $8 per unit Discount rate: 12% Project life: 3 years Tax rate: 34% Assume that you sell the machine for book value at the end of year 3 so there is no capital gain or loss on the initial investment. How many units per year do they have to sell to break even from an NPV standpoint?

Answer 1

Answer

To calculate the units to be sold to break even from NPV standpoint, we need to calculate Equivalent Annual Cost,

EAC = Initial Investment / PVAF @12% for 3 Years

PVAF @12% for 3 yaers = 2.4018312

EAC = $700 / 2.4018312

EAC = $291.444

Contribution margin per unit = Sale price – Variable cost

= $5(8 – 3)

Present value Breakeven point = [EAC + Fixed Cost (1-Tax) –Depreciation (Tax)] / Contribution Margin (1-Tax)

= [291.44 + 200(1-0.34) – 140 (0.34)] / 5 (1-0.34)

= 113.89 Units

Present value Breakeven point = 114 Units

Company needs to sell 114 units to break even from NPV standpoint