Question

Jed's Cars, Inc., just purchased a $432,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its six-year economic life. Each toy sells for $27. The variable cost per toy is $12, and the firm incurs fixed costs of $274,000 each year. The corporate tax rate for the company is 21 percent. The appropriate discount rate is 11 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.)

financial break-even = in units ?

Answer 1

The financial breakeven point will be as follows:

EAC of investment will be as follows:

= Purchase cost / Present value annuity factor of 11% of 6 years

Present value annuity factor of 11% of 6 years is computed as follows:

= [ (1 – 1 / (1 + r)ⁿ) / r ]

= [ (1 - 1 / (1 + 0.11)⁶ ) / 0.11 ]

= 4.230537854

So, the EAC will be as follows:

= $ 432,000 / 4.230537854

= $ 102,114.6755

So, the units will be as follows:

= [ EAC + Fixed cost x (1 - tax rate) - (Depreciation x tax rate) ] / [ (Selling price - variable cost) x (1 - tax rate) ]

= [ $ 102,114.6755 + $ 274,000 x (1 - 0.21) - ( ($ 432,000 / 6) x 0.21) ] / [ ($ 27 - $ 12) x (1 - 0.21) ]

= [ $ 102,114.6755 + $ 216,460 - $ 15,120] / $ 11.85

= $ 303,454.6755 / $ 11.85

= 25,607.99 units Approximately

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