Answer:
the present value break-even point in units per yea is 4680 units. the option (d) is correct
Explanation:
Solution
Given that:
The initial cash flow = $754,000
The project life is = four years
Thus,
Contribution = sales - variable costs
So,
Sales = quantity * the price
Let the Quantity be Y
$230 Y - $102.40 Y
=127.60 Y
Now,
The operating income = Contribution -fixed costs
which is,
127. 60 Y- (Other depreciation or decrease + decrease)
127. 60 Y- ( $333,000 + ($754,000/4))
= 127. 60 Y- ( $333,000 + $188,500)
Thus,
127. 60 Y - $521, 500
Now,
Tax rate at 21% on operating income is =26.796 Y - 109. 515
The profit after tax = operating income - tax
(127. 60 Y - $521, 500) -(26.796 Y - 109. 515)
= 100.804 Y - 411, 985
Additional depreciation = $188, 500
The operating cash inflow per year = 100.804 Y - 411, 985 + $188, 500
Thus,
The PVAF for 12 years , 4% = 3.037349
PV of operational cash inflow = 306.18 Y - 678, 802.02
However,
For the break even point: the initaila cash flow = The PV of functioning or operational cash inflow
So,
306.18 Y - 678, 802.02 =$ 754,400
306.18 Y = 1, 432, 802.02
Y = 4680 Units
