Question

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per = $43.70 abalone Variable costs per - $10.80 abalone Fixed costs per year Depreciation per year = $462,000 $137,000 Tax rate = 22% The discount rate for the company is 14 percent, the initial investment in equipment is $959,000, and the project's economic life is 7 years. Assume the equipment is depreciated on a straight-line basis over the project's life and has no salvage value. a. What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. Accounting break-even level a. 18,206.69 units b. Financial break-even level 22,589 27 units

Answer 1

Financial break-even level can be calculated by trial and error method such that NPV is zero on that level.

Sales	943,157.9
VC	(233,091.6)
FC	(462,000.0)
Depreciation	(137,000.0)
EBT	111,066.2
Tax (22%)	(24,434.6)
Net Income	86,631.7
Cash Flow	223,631.7
NPV	0.7

We get when quantity = 21,582.56, NPV = 0, which is the financial break-even level.

Cash Flows = Net Income + Depreciation = $223,631.7

NPV can be calculated using PV function on a calculator

N = 7, I/Y = 14%, PMT = 223,631.7, FV = 0 => Compute PV = $959,000

NPV = PV (inflows) - Investment = $0