Question

ou are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information:

Sales price per abalone = $44.40

Variable costs per abalone = $11.15

Fixed costs per year = $490,000

Depreciation per year = $120,000

tax rate = 24%

The discount rate for the company is 16 percent, the initial investment in equipment is $960,000, and the project’s economic life is 8 years. Assume the equipment is depreciated on a straight-line basis over the project’s life and has no salvage value.

a. What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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

Answer 1

a.

Accounting break-even level

18,345.86 units

Accounting brak-even in units = ( Fixed Cost + Depreciation ) x( 1 - T ) / Unit After-tax Contribution Margin

= $ ( 490,000 +120,000) x 0.76 / $ ( 44.40 - 11.15) x 0.76

= $ 463,600 / 25.27

=18,345.86 units.

b.

Financial break-even level

22,343.30 units

Equivalent annual cost ( EAC) = Initial Investment / PVA_{16%,8 years}

= $ 960,000 / 4.34359

= $ 221,015.29

Financial break-even units = ( 221,015.29 + 490,000 *0.76 -120,000 * 0.24) / 25.27 = 22,343.30