Wettway Sailboat Corporation is considering whether to launch its new Margo-clas

Question

Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $38,000 per boat. The variable costs will be about half that, or $19,000 per boat, and fixed costs will be $600,000 per year.

The Base Case: The total investment needed to undertake the project is $2,900,000. This amount will be depreciated straight-line to zero over the five-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Wettway has a 15 percent required return on new projects.

Use the above expression to find cash, accounting and financial break-even points for Wettway Sailboat. Assume a tax rate of 38 percent. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $38,000 per boat. The variable costs will be about half that, or $19,000 per boat, and fixed costs will be $600,000 per year.

The Base Case: The total investment needed to undertake the project is $2,900,000. This amount will be depreciated straight-line to zero over the five-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Wettway has a 15 percent required return on new projects.

Explanation / Answer

OCF = Initial Investment / PVA of $1 (15%, 5)
OCF = $2,900,000 / 3.3522
OCF = $865,103.51

Selling Price, P = $38,000
Variable Cost, VC = $19,000
Fixed Cost, FC = $600,000
Tax, T = 38%

Annual Depreciation, D = Initial Investment / Useful Life
Annual Depreciation, D = $2,900,000 / 5
Annual Depreciation, D = $580,000

Accounting Breakeven = (FC + D) / (P - VC)
Accounting Breakeven = ($600,000 + $580,000) / ($38,000 - $19,000)
Accounting Breakeven = $1,180,000 / $19,000
Accounting Breakeven = 62.11

Cash Breakeven = FC / (P - VC)
Cash Breakeven = $600,000 / ($38,000 - $19,000)
Cash Breakeven = $600,000 / $19,000
Cash Breakeven = 32.58

Financial Breakeven = (FC + OCF) / (P - VC)
Financial Breakeven = ($600,000 + $865,103.51) / ($38,000 - $19,000)
Financial Breakeven = $1,465,103.51 / $19,000
Financial Breakeven = 77.11

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