Question

XYZ Co. is evaluating whether to invest in a project with the following information: Project cost...

XYZ Co. is evaluating whether to invest in a project with the following information:

Project cost = $950,000

Project life = five years

Projected number of units sold per year = 10,000

Projected price per unit = $200

Projected variable cost per unit = 150

Fixed costs per year = $150,000

Required rate of return = 15%

Marginal tax rate = 35%

Assume straight-line depreciation to zero over five years, and ignore the half-year rule for accounting for depreciation.

  1. Calculate the cash break-even sales quantity for this project.
  2. Calculate the accounting break-even sales quantity for this project.
  3. Calculate the financial break-even sales quantity for this project.
  4. Calculate the Degree of Operating Leverage (DOL) at the cash break-even, accounting break-even, and financial break-even sales quantities.

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