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Ayden’s Toys, Inc., just purchased a $445,000 machine to produce toy cars. The machine will be...

Ayden’s Toys, Inc., just purchased a $445,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its 5-year economic life. Each toy sells for $13. The variable cost per toy is $5 and the firm incurs fixed costs of $305,000 per year. The corporate tax rate for the company is 22 percent. The appropriate discount rate is 10 percent. What is the financial break-even point for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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Answer #1

Statement showing PV of cash inflow (Assuming units to be sold P)

Particulars 1 year to 5 year
Selling price per unit 13
Variable cost per unit 5
Contribution per unit 8
No of units P
Total contribution 8P
Less:
Fixed cost 305000
Depreciation 89000
PBT 8P - 394000
Tax @ 22% 1.76P - 86680
PAT 6.24P - 307320
Add: Depreciation 89000
Annual cash flow 6.24P -218320
PVIFA(10%,5years) 3.7908
PV of cash inflow 23.6545P - 827604.5675

Thus to achieve cash break even , PV of cash inflow = PV of cash outflow

= 23.6545P - 827604.5675 = 445000

= 23.6545P = 1272604.5675
P = 53799.66 units

Thus units to be sold = 53799.66 units

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