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:

The discount rate for the company is 13 percent, the initial investment in equipment is $660,000, and the project’s economic life is six years. Assume the equipment is depreciated on a straight-line basis over the project’s life.

What is the accounting break-even level for the project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information:

Explanation / Answer

EBIT = (24 – 5.10)Q – 365,000 – 110,000 = 18.9Q – 475,000

Net Income = (18.9Q – 475,000)*(1 – T)

For accounting break-even, Net Income = 0

Q = 475,000/18.9 = 25,132.28

OCF = (18.9Q – 475,000)*(1 – 0.34) + 110,000

OCF = 18.9*0.66Q - 475,000*0.66 + 110,000

OCF = 12.474Q – 203,500

For financial break-even, NPV = 0

NPV = -660,000 + (OCF/0.13)*(1 – 1/1.13^6)

660,000 = 3.997550 OCF

OCF = 165101.13

Now, OCF = 12.474Q – 203,500 = 165101.13

Q = (203500 + 165101.13)/ 12.474 = 29,549.55

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