Question

lazy snake industries is considering a new capital budgeting project that will last for three years. lazy snake plans on using a cost of capital of 12% to evaluate this project. analysis department has prepared the following incremental cash flow projections:

year	0	1	2	3
Sales (revenues)		150000	165000	180000
-Cost of goods sold (50% of sales)		75000	82500	90000
-Depreciation		30000	30000	30000
=EBIT		45000	52500	60000
-Taxes (35%)		15750	18375	21000
=Unlevered net income		29250	34125	39000
+Depreciation		30000	30000	30000
+Changes to working capital		-10000	-10000	20000
-capital expenditures	-140000

the break-even level of cost of goods sold (expressed as % of sales) is closest to:

a) 50%

b) 12%

c) 54%

d) 58%

Answer 1

1)

Break-even level of cost of goods sold:

= Cost of goods sold/Sales

= $75,000/$150,000

= 50%

Hence, correct option is “a). 50%”

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