The Financial Calculator Company proposes to invest $12 million in a new calcula

Question

The Financial Calculator Company proposes to invest $12 million in a new calculator-making plant. Fixed costs are $3 million per year. A financial calculator costs $10 per unit to manufacture and sells for $30 per unit. If the plant lasts for four years and the cost of capital is 20%, what is the break-even level (i.e., NPV = 0) of annual sales? (Assume that revenues and costs occur at the end of each year. Assume no taxes.) Round to the nearest 1,000 units. A) 150,000 units B) 342,000 units C) 382,000 units D) 300,000 units

Explanation / Answer

Let the break-even level be Q

Contribution per unit = Sales per unit – Variable cost

                                    = 30 – 10

                                    = $20

Total contribution = $20Q

Profit = Total contribution – Fixed cost = $20Q – 3,000,000

NPV = PW of profit (20%, 4 years) – Initial investments

    0    = 51.774Q – 7,766,100 – 12,000,000

51.774Q = 19,766,100

Q = 381,776.57

    = 382,000 (after rounding)

Answer: C

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.