Question

Given the following forecasted data, determine the number of planes that the company must produce in order to break even, on both accounting basis and NPV basis assuming 6years as life of project. The project initial investment is $900 million, each plane sold for $15.5 million, the variable cost is $8 million each plane, the fixed cost is $150 million, the depreciation uses straight-line method, tax rate is 40% and the company’s cost of capital is 10%. Please explain work as much as possible.

Answer 1

On accounting basis, break-even planes = (Fixed Cost + Depreciation) / (Price - VC)

= (150 + 900 / 6) / (15.5 - 8) = 40 planes

For NPV basis, we need to figure out no. of planes such that NPV = 0. Using trial and error method, we get 53 planes to break even.

	0	1	2	3	4	5	6
Investment	-900
Sales		821.5	821.5	821.5	821.5	821.5	821.5
VC		-424	-424	-424	-424	-424	-424
FC		-150	-150	-150	-150	-150	-150
Depreciation		-150	-150	-150	-150	-150	-150
EBT		97.5	97.5	97.5	97.5	97.5	97.5
Tax (40%)		-39	-39	-39	-39	-39	-39
Profits		58.5	58.5	58.5	58.5	58.5	58.5
Cash Flows	-900	208.5	208.5	208.5	208.5	208.5	208.5
NPV	$8.07