You are considering investing in a company that cultivates abalone for sale to l

Question

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information:

Sales price per abalone     = $80

Variable cost per abalone = $5.40

Fixed cost per year           = $750,000

Depreciation per year       = $51,429

Tax Rate                          = 35%

The discount rate for the company is 15 percent, the initial investment in equipment is $360,000, and the project's economic life is 7 years. Assume the equipment is depreciated on a straight-line basis over the project's life ($51,429 per year). What is the Financial Break-Even level for the project? Do not use a comma in your numerical answer.

Explanation / Answer

For getting 0 NPV, the required OCF = 360000*0.15*1.15^7/(1.15^7-1) = $    86,529.73 Now OCF = [q*(80-5.40)-750000]*0.65+51429*0.35 = 86529.73 Where q = the quantity to be sold, for 0 NPV. Solving for q 48.49*q-487500+18000.15 = 86529.73 q = (86529.73+487500-18000.15)/48.49 = 11466.89 = 11467 abalones. Answer: Financial break even level = 11467 abalones ($917,360)

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