Question

Consider a project with the following data: accounting break-even quantity = 5,500 units; cash break-even quantity = 5,000 units; life = six years; fixed costs = $170,000; variable costs = $26 per unit; required return = 8 percent. Ignoring the effect of taxes, find the financial break-even quantity. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

we will use the cash break even to find the price of the product as follows

QC= FC/(P –v)

5000= $170,000/(P – $26)

P = $ 60

accounting breakeven equation to find the depreciation

QA= (FC + D)/(P –v)

5500 = ($170,000 + D)/($60 –26)

D=Depreciation =$17000

Assuming straight-line depreciation is used, the initial investment in equipment must be sixtimes the annual depreciation

Initial investment =$17000*6=$102000

The PV of the OCF must be equal to this value at the financial breakeven since the NPV is zero, so

$102000= OCF(PVIFA8%,6)

$102000/4.62288

OCF=22064.17

We can now use this OCF in the financial breakeven equation to find the financial breakeven sales quantity.

QF= ($170,000 + 22064.17)/($60 –26)

Financial break-even quantity=5648.95 units