value: 10.00 points Niko has purchased a brand new machine to produce its High F
ID: 2779615 • Letter: V
Question
value: 10.00 points Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of six years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $636,000. The sales price per pair of shoes is $61, while the variable cost is $15. $156,000 of fixed costs per year are attributed to the machine. Assume that the corporate tax rate is 35 percent and the appropriate discount rate is 9 percent. What is the financial break-even point? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32) Financial break-even point units References eBook & Resources Worksheet Section: 7.1 Sensitivity Analysis, Scenario Analysis, and Break- even Analysis Difficulty: 1 Basic Check my workExplanation / Answer
The term financial BEP implies that we must have NPV = 0.
That means annual cash flows of each year are such that the total present value of such cash flows shall be exactly equal to the investment.= 636000.
EAC = Equivalent annual cost = annual cash flow = 636000 / [ PVA 9%, 6 Years ] = 636,000 / 4.485919 = 141,777
Financial BEP = [ EAC + FC ( 1 - Tc) - Dep (Tc) ] / CM(1 - Tc)
= [ 141777 + 101400 - 37100 ] / 29.90
= 6892 Units...............final answer
Explation of formula in by-parts.
FC = Fixed cost = 156,000 . By multiplying with ( 1 - Tc) it will convert into after tax = 156000 ( 1 - 0.35) = 101400
Dep = Depreciation = 636000 / 6 years = 106,000. Tax saved on it = Dep(Tc) = 106000 * 0.35 = 37100
CM = Contribution margin = 61 - 15 = 46. After tax CM = 46(1 - 0.35) = 29.90
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