Question

12) A project has an accounting break-even quantity of 28,700 units, a cash break-even quantity of 17,120 units, a life of 10 years, fixed costs of $178,000, variable costs of $18.40 per unit, and a required return of 14 percent. Depreciation is straight-line to zero over the project life. Ignoring taxes, what is the financial break-even quantity? A) 39,723 units B) 39,624 units C) 39,201 units D) 39,320 units E) 39,458 units please show step by step using all break-evens

Answer 1

Answer is $39320

Cash break-even quantit =Fixed Cost/(Sales Price-Variable Cost per unit)

17120=178000/(Sales Price-18..40)

Sales Price =30813/1070

accounting break-even quantity =(Fixed Cost+Depreciation)/(Sales Price-Variable Cost per unit)

28700=(178000+X)/(30813/1070-18.40)

Depreciation=120400

Initial investment=120400*10

=1204000

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

1204000= OCF(PVIFA14%,10)

=230822

Financial Break Event Point = (Operating Cash Flow + Fixed Cost) / (Price - Variable Cost)(178000+230822)/(30813/1070-18.40)

=39320 Units