Question

Cecil's Manufacturing is considering producing a new product. The sales price would be $10.65 per unit. The cost of the equipment is $81,000. Operating and maintenance costs are expected to be $3,500 annually. Based on a 7-year planning horizon and a MARR of 12%, determine the number of units that must be sold annually to achieve breakeven. units Carry all interim calculations to 5 decimal places and then round your final answer up to the nearest unit. The tolerance is £5.

Answer 1

Answer:

The cost of investment is $81,000
Number of years is 7
The MARR is 12%
The annual operating and maintenance cost is $3,500
The selling price is $10.65

We have to first find out the annual net cash inflow received for 7 years at 12% will be equal to cost of investment.

The present value of $1 received annually for 7 years at 12% is 4.563.

Calculate net annual cash inflow as follows:

Cost of investment = Net annual cash inflow x 4.563
Net annual cash inflow = cost of investment/4.563
=81,000/4.563
=17,751.48

Thus the net annual cash inflow is $17,751.48

Calculate gross cash inflow as follows:
To calculate he gross cash inflows add annual operating and maintenance cost to net annual cash inflow.

Gross annual cash inflow = $17,751.48 + $3,500 = $21,251.48

Calculate break even units as follows:

BEP in units = Gross annual cash inflow/selling price per unit
=21,251.48/10.65
=1,995.44 units

Therefore the break even units to be sold annually is 1,995.44 units