Question

James, Inc., has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of 6 years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $624,000. The sales price per pair of shoes is $92, while the variable cost is $41. Fixed costs of $320,000 per year are attributed to the machine. The corporate tax rate is 22 percent and the appropriate discount rate is 9 percent.

What is the financial break-even point? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16)

Answer 1

Financial break even point is the quantity of production and sale
for which NPV = 0.
Therefore,
0 = -624000+[q*(92-41)-320000]*(1-22%)*PVIFA(9,6)+104000*22%*PVIFA(9,6)
Where q = the quantity of sale at which NPV = 0.
0 = -624000+(q*51-320000)*0.78*4.48592+104000*0.22*4.48592
(624000-104000*0.22*4.48592)/(0.78*4.48592)+320000 = q*51
q =469002/51 = 9196 pairs [Financial break even point]
CHECK FOR 0 NPV:
Contribution margin = 9196*51 =	468996
Fixed costs	320000
Depreciation	104000
NOI	44996
Tax at 22%	9899
NOPAT	35097
Add: Depreciation	104000
OCF	139097
PV of OCF = 139097*4.48592 =	623978
Less: Initial cost	624000
NPV	-22
	Almost 0