Question

Consider a project with the following data: accounting break-even quantity = 30,229 units; cash break-even quantity = 17,933 units; life = 9 years; fixed costs = $205,385; variable costs = $21 per unit; required return = 12 percent; depreciation = straight line. Ignoring the effect of taxes, what is the financial break-even quantity?

Answer 1

Cash break even = Fixed cost / Price - Variable cost

17,933 = 205,385 /P -21

17,933(P) - 17,933 *21 = 205,385

P = $32.45 per unit

Accounting Break even point = (FC+D)/(P-V))

30,299 = (205,385+D)/($ 32.45-21)

Therefore depreciation = $141,539

Initial investment = 9($141,539) = $1,273,851

The PV of the OCF must be equal to this value at the financial breakeven since the N PV is 0:

$1,273,851 = OCF (PVIFA 12%,9 )

OCF = $239,077.17

Financial Break even Quantity = ($205,385+239077.17)($32.45-21)

= 38,817.66 Units