A project has the following estimated data: price = $62 per unit; variable costs

Question

A project has the following estimated data: price = $62 per unit; variable costs = $41 per unit; fixed costs are $15,500; required return is 12 percent; initial investment is $24,000; life is four years. Ignoring the effect of taxes, what is the accounting break-even quantity? The cash break-even quantity? The financial break-even quantity? What is the degree of operating leverage at the financial break-even level of output? How do you interpret the calculated degree of operating? Please show your work.

Explanation / Answer

Answer:

a) The accounting breakeven for the project is:

QA= [$14,500 + ($24,000/4)]/($40 – 28) = 1,708.33

b) The cash breakeven is:

QC = $14,500/($40 – 28) = 1,208.33

c) At the financial breakeven, the project will have a zero NPV. Since this is true, the initial costof the project must be equal to the PV of the cash flows of the project. Using this relationship,we can find the OCF of the project must be:

NPV = 0$24,000 = OCF(PVIFA12%,4)OCF = $7,901.75

Using this OCF, we can find the financial breakeven is:

QF= ($15,500 + 7,901.75)/($62– 41) = 1,114.37

d) The DOL of the project is:

DOL = 1 + ($15,500/$7,901.75) = 2.9615

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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