Ayden's Toys, Inc., just purchased a $284,000 machine to produce
toy cars. The machine will be fully depreciated by the
straight-line method over its four-year economic life. Each toy
sells for $23. The variable cost per toy is $10, and the firm
incurs fixed costs of $273,000 each year. The corporate tax rate
for the company is 40 percent. The appropriate discount rate is 10
percent. What is the financial break-even point for the project?
(Do not round intermediate calculations and round your
answer to 2 decimal places, e.g., 32.16.)
Break-even
point units
Initial Investment = $284,000
Useful Life = 4 years
Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $284,000 / 4
Annual Depreciation = $71,000
Discount Rate = 10%
PVIFA(10%, 4) = 3.16987
EAC = Initial Investment / PVIFA(10%, 4)
EAC = $284,000 / 3.16987
EAC = $89,593.58
Financial Breakeven Point = [EAC + Fixed Cost * (1 - tax) -
Depreciation * tax] / [(Selling Price per unit - Variable Cost per
unit) * (1 - tax)]
Financial Breakeven Point = [$89,593.58 + $273,000 * (1 - 0.40) -
$71,000 * 0.40] / [($23.00 - $10.00) * (1 - 0.40)]
Financial Breakeven Point = [$89,593.58 + $163,800 - $28,400] /
[$7.80]
Financial Breakeven Point = $224,993.58 / $7.80
Financial Breakeven Point = 28,845 units
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