Wettway Sailboat Corporation is considering whether to launch its new Margo-clas

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Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $40,000 per boat. The variable costs will be about half that, or $20,000 per boat, and fixed costs will be $800,000 per year. The Base Case: The total investment needed to undertake the project is $3,000,000. 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. 1formula16.mml 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.)
Cash break-even Accounting break-even Financial break-even ReferenceseBook & Resources WorksheetDifficulty: ChallengeSection: 11.2 Scenario and Other What-If Analyses
Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $40,000 per boat. The variable costs will be about half that, or $20,000 per boat, and fixed costs will be $800,000 per year. The Base Case: The total investment needed to undertake the project is $3,000,000. 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. 1formula16.mml 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.)
Cash break-even Accounting break-even Financial break-even ReferenceseBook & Resources WorksheetDifficulty: ChallengeSection: 11.2 Scenario and Other What-If Analyses
Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $40,000 per boat. The variable costs will be about half that, or $20,000 per boat, and fixed costs will be $800,000 per year. The Base Case: The total investment needed to undertake the project is $3,000,000. 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. 1formula16.mml 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.)
Cash break-even Accounting break-even Financial break-even ReferenceseBook & Resources WorksheetDifficulty: ChallengeSection: 11.2 Scenario and Other What-If Analyses

Explanation / Answer

1. cash break even point = Fixed cost - depreciation / pv ratio = 800000 - 600000 / 50 % = $400000

depreciation = 3000000/5= 600000

P/v ratio = contributuin / sales = 40000-20000 / 40000 = 50 %

2. accounting break even point = Fixed cost / pv ratio = 800000 / 50 % = $1600000

3. Financial break even = investment X minimum rate of return / 1 - tax rate

= 3000000 * 12 % / 1 - .38 = 580645.2

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