Question

Grace P. has compiled this information related to a new project: Initial investment: $1,550,000; Fixed costs: $420,000; Variable costs: $8.10 per unit; Selling price: $28.80 per unit; Discount rate: 14 percent; Project life: 6 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? 38,522 39,211 40,286 41,804 42,374

Answer #1

Let the sales units be X

Particulars |
Amount ($) |

Sales (Selling price per unit * Units) | 28.8X (28.8 * X) |

Variable cost (Variable cost per unit * Units) | 8.1X (8.1 * X) |

Contribution (Sales - Variable cost) | 20.7X |

Fixed cost | 420,000 |

Depreciation (1,550,000
/ 6) |
258,333 |

PBT (Contribution - Fixed cost - Depreciation) | 20.7X - 678,333 |

Tax @ 25% (PBT * 25%) | 5.175X - 169,583.25 |

PAT (PBT - Tax) | 15.525X - 508,749.75 |

Add: Depreciation | 258,333 |

Annual cash flow | 15.525X - 250,416.75 |

PVIFA @ 14% for 6 years | 3.889 |

PV of cash flow (Annual cash
flow * PVIFA) |
60.38X -
973,870.74 |

Financial break-even point =>

PV of cash flow = Initial investment

60.38X - 973,870.74 = 1,550,000

60.38X = 1,550,000 + 973,870.74

X = 2,523,870.74 **/** 60.38

**X = 41,799.78 (approx.)**

Therefore, the exact answer is **$41,804**.

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