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Please add explanations. 4. What is the financial break-even point? Price = $100 per unit; variable...

Please add explanations.

4. What is the financial break-even point? Price = $100 per unit; variable cost = $24 per unit, fixed cost = $40,000 per year; depreciation = $10,000 per year. Assume a discount rate of 10%, project initial outlay of $100,000, project life of 10 years, and ignore taxes.

A)   527 units

B)   624 units

C)   658 units

D)   741 units

E) 1,130 units

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Homework Answers

Answer #1

PV of Annuity = P*[1-{(1+i)^-n}]/i

Where, PV = 100000, i = Interest Rate = 0.1, n = Number of Periods = 10

Therefore,

100000 = P*[1-{(1+0.1)^-10}]/0.1

10000 = P*0.6144567

Therefore, Annuity = P = 10000/0.6144567 = $16274.54

Therefore, Cash Flows every year should be $16274.54

As, Tax Rate is Not given, Depreciation is Irrelevant.

Therefore, Cash Flow = Net Profit = $16274.54

Therefore, Contribution = Net Profit+Fixed Cost = 16274.54+40000 = $56274.54

Therefore, Break Even Quantity = Contribution/Contribution per unit i.e. (Selling Price-Variable Cost) = 56274.54/(100-24) = 56274.54/76 = 740.54 = 741 units

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