Question

# A project has the following estimated data: price = \$90 per unit; variable costs = \$36.9...

A project has the following estimated data: price = \$90 per unit; variable costs = \$36.9 per unit; fixed costs = \$7,700; required return = 15 percent; initial investment = \$10,000; life = five years. Ignore the effect of taxes. Required: (a) What is the accounting break-even quantity? (Do not round your intermediate calculations.) (b) What is the cash break-even quantity? (Do not round your intermediate calculations.) (c) What is the financial break-even quantity? (Do not round your intermediate calculations.) (d) What is the degree of operating leverage at the financial break-even level of output? (Do not round your intermediate calculations.)

Depreciation = Initial Investment / Life = \$10,000/5 = \$2,000

a). QA = (FC + D) / (P - V)

= (\$7,700 + \$2,000) / (\$90 - \$36.9)

= \$9,700 / \$53.10 = 182.67

b). QC = FC / (P - V)

= \$7,700 / (\$90 - \$36.9)

= \$7,700 / \$53.10 = 145.01

c). The PV of the OCF must be equal to this value at the financial breakeven since the NPV is zero, so

\$10,000 = OCF(PVIFA15%,5)

\$10,000 = OCF x 3.3522

OCF = \$10,000/3.3522 = \$2,983.12

QF = (FC + OCF) / (P - V)

= (\$7,700 + \$2,983.12) / (\$90 - \$36.9)

= \$10,683.12 / \$53.10 = 201.19

d). DOL = [Q(P - V)] / [{Q(P - V)} - FC]

= [201.19(\$90 - \$36.9)] / [{201.19(\$90 - \$36.9)} - \$7,700]

= \$10,683.12 / [\$10,683.12 - \$7,700]

= \$10,683.12 / \$2,983.12 = 3.58x