Economic break even point: Rose Weiser Company management is considering a proje

Question

Economic break even point: Rose Weiser Company management is considering a project that will require an initial investment of $50,000 and will last for 10 years. No other capital expenditures of increases in working capital are anticipated during the life of the project. What is the annual EBIT that will make the project economically viable if the cost of capital for the project is 9 percent and the firm will depreciate the investment using straight line depreciation and a salvage value of $0? Assume that the marginal tax rate is 40 percent.

Explanation / Answer

The initial cost of the project is $ 50000

period of the project is 10 years

cost of capital is 9%

and tax rate is 40%

at 9% for 10 year period the sum of the discounted facors is =6.416

present values of future income =$ 50000/6.416=$ 7793.00

and the this is the amount equal to EBIT+Depreciation =$ 7793.00

so when we substract depreciation from $ 7793(40%) we will get the required EBIT

so 7793*40%=3317.20

so the required EBIT=7793.00-3317.20=$ 4475.80

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

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