Question

A company sells Tidbits to consumers at a price of $83 per unit. The costs to produce Tidbits is $40 per unit. The company will sell 17,000 Tidbits to consumers each year. The fixed costs incurred each year will be $120,000. There is an initial investment to produce the goods of $2,800,000 which will be depreciated straight line over 20 year life of the investment to a salvage value of $0. The opportunity cost of capital is 12% and the tax rate is 32%.

What is operating cash flow each year? 460280 Correct response: 460,280±10 Click "Verify" to proceed to the next part of the question.

Using an operating cash flow of 460,280 each year, what is the NPV of this project? Correct response: 638,035.51±100

Given a net present value of $638,035.51, should the company accept or reject this project? Reject Accept Correct response: Accept

Find the net present value break-even level of units sold. Round your answer to the nearest whole unit Enter your response beloW ^^^^^ANSWER THIS QUESTION THE OTHER ANWSERS ARE ALREADY CORRECT

Answer 1

To calculate net present value break-even level of units sold means that Net present value is 0

Net Present value = Present Value of Cash Inflow - Present Value of Cash Outflow

0 = Present Value of Cash Inflow - 2,800,000

2,800,000 = {[(Selling Price - Variable Cost) * Number of units - Fixed Cost ] * (1 - tax rate) + [Depreciation * Tax rate]} * PVAF @ 12% for 20 years

Let number of units be x

2,800,000 = {[(83 - 40) * x - 120,000 ] * (1 - 0.32) + [(2,800,000 / 20) * 32%]} * 7.46944362384

2,800,000 = {43x - 120000} * 0.68 + [140000 * 32%] } * 7.46944362384

2,800,000 = {29.24x - 81600 + 44800} * 7.46944362384

2,800,000 / 7.46944362384 = 29.24x - 81600 + 44800

374,860.584135 = 29.24x - 81600 + 44800

374860.584135 - 44800 + 81600 = 29.24x

==> 29.24x = 411,660.584135

x = 411,660.584135 / 29.24

= 14078.68 or 14079 units

Net present value break-even level of units sold is 14079 units.