Question

Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $49,000 per boat. The variable costs will be about half that, or $28,000 per boat, and fixed costs will be $545,000 per year.

The total investment needed to undertake the project is $3,900,000. This amount will be depreciated straight-line to zero over the 7-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Wettway has a required return of 19 percent on new projects.

Q =FC +OCF−TC× D1−TCP−vQ =FC +OCF−TC× D1−TCP−v Use the above expression to find the cash, accounting, and financial break-even points for Wettway Sailboat. Assume a tax rate of 24 percent.

   

	Cash break-even Accounting break-even    Financial break-even

Answer 1

A В E (Fixed costs+Depreciation) Contribution Accounting break-even point per unit 52.48(3900000/7+545000)/(49000-28000) a 25.95 -545000/(49000-28000) 2 b Cash break-even quantity Fixed costs/Contribution per unit Financial break-even quantity (Fixed costs+OCF) / Contribution per unit83.52 -((PMT(19%,7,-3900000,0)-(3900000/7)*24%)/(1-24%)+545000)/(49000-28000)

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