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 $32,000 per boat. The variable costs will be about half that, or $16,000 per boat, and fixed costs will be $500,000 per year.

The Base Case: The total investment needed to undertake the project is $2,600,000. 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 12 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)

Explanation / Answer

Cash break-even = Fixed Cost/(P-v)

Cash break-even = 500000/(32000-16000)

Cash break-even = 31.25 Units

Annual Depreciation = (Cost - salvage value)/useful life

Annual Depreciation = (2600000-0)/5

Annual Depreciation = 520000

Accounting break-even = (Fixed Cost+Annual Depreciation)/(P-v)

Accounting break-even =  (500000 + 520000)/(32000-16000)

Accounting break-even = 63.75 units

Financial break-even

PV of cash outflow = PV of cash inflow

2600000 = ((32000-16000)*Q*(1-38%)) + 520000*38%)*PVIFA(12%,5)

2600000 = (9920Q + 197600 )*3.604776

Q = (2600000/3.604776 - 197600)/9920

Q = 52.79 Units

Financial break-even = 52.79 Units

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