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 par abalone = $80 Variable cost per aa Fixed cost per year = $750,000 Deprecation 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 projects economic lite is 7 years. Assume the equipment is depreciated on a straight-line basis over the projects 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

Break even unit level is sales where NPV = 0

Break even unit= 11466.89 Time line 0 1 2 3 4 5 6 7 Cost of new machine -360000 Net working capital 0 =Initial Investment outlay -360000 Earnings =(sales price- variable cost)*number of UNITS 855430.4 855430.4 855430.4 855430.4 855430.4 855430.4 855430.4 -Depreciation Cost of new machine/7 -51428.6 -51428.6 -51428.6 -51428.6 -51428.6 -51428.6 -51428.6 -fixed cost -750000 -750000 -750000 -750000 -750000 -750000 -750000 =Pretax cash flows 54001.78 54001.78 54001.78 54001.78 54001.78 54001.78 54001.78 -taxes =(Pretax cash flows)*(1-tax) 35101.16 35101.16 35101.16 35101.16 35101.16 35101.16 35101.16 +Depreciation 51428.57 51428.57 51428.57 51428.57 51428.57 51428.57 51428.57 =after tax perating cash flow 86529.73 86529.73 86529.73 86529.73 86529.73 86529.73 86529.73 reversal of working capital 0 +Proceeds from sales after tax 0 "=Terminal year after tax cash flows 0 Total Cash flow for the period -360000 86529.73 86529.73 86529.73 86529.73 86529.73 86529.73 86529.73 Required rate of return= 15% Discount factor= (1+ required rate)^N 1 1.15 1.3225 1.520875 1.749006 2.011357 2.313061 2.66002 Discounted cash flow= total cash flow/discount factor -360000 75243.24 65428.91 56894.7 49473.65 43020.57 37409.19 32529.73 NPV= Sum of discounted cash flow = -5E-09

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