Question

Consider a project to supply Detroit with 27,000 tons of machine screws annually for automobile production. You will need an initial $5,300,000 investment in threading equipment to get the project started the project will last for 6 years. The accounting department estimates that annual fixed costs will be $1.275,000 and that variable costs should be $240 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the 6-year project life. It also estimates a salvage value of $650,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $350 per ton. The engineering department estimates you will need an initial networking capital inyestment of $510,000. You require a return of 14 percent and face a tax rate of 25 percent on this project Calculate the accounting, cash, and financial break-even quantities (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) INN Cash break-even Accounting break-even Financial break-even

Answer 1

Cash Break-even = FC / (P - VC) = 1,275,000 / (350 - 240) = 11,591 units

Accounting Break-even = (FC + Depreciation) / (P - VC) = (1,275,000 + 883,333) / (350 - 240) = 19,621 units

For Financial Break-even, we need to do the NPV analysis. Using trial and error method, we need to find quantity such that NPV is zero. We get for 21,149 units, NPV is almost zero, which is the financial break even

Detroit	0	1	2	3	4	5	6
Investment	-$5,300,000
NWC	-$510,000						$510,000
Salvage							$650,000
Sales		$7,402,150	$7,402,150	$7,402,150	$7,402,150	$7,402,150	$7,402,150
VC		-$5,075,760	-$5,075,760	-$5,075,760	-$5,075,760	-$5,075,760	-$5,075,760
FC		-$1,275,000	-$1,275,000	-$1,275,000	-$1,275,000	-$1,275,000	-$1,275,000
Depreciation		$883,333	-$883,333	-$883,333	-$883,333	-$883,333	-$883,333
EBT		$168,057	$168,057	$168,057	$168,057	$168,057	$168,057
Tax (25%)		-$42,014	-$42,014	-$42,014	-$42,014	-$42,014	-$42,014
Net Income		$126,043	$126,043	$126,043	$126,043	$126,043	$126,043
Cash Flows	-$5,810,000	$1,009,376	$1,009,376	$1,009,376	$1,922,376	$1,922,376	$2,919,876
NPV	$278