Answer:
Check the following calculations
Explanation:
a). Depreciation = Cost of the project / Useful life years = $4,400,000 / 6 = $733,333.33
Operating Cash Flow = EBIT - Tax + Depreciation
[{Q*(Price - Variable Cost)} - Fixed Costs - Depreciation]*(1 - Tax Rate) + Depreciation = 0
Q = [{-Depreciation/(1 - Tax Rate)} + Fixed Costs + Depreciation]/(Price - Variable Cost)
Q = [{-$733,333.33/(1-0.24)} + $595,000 + $733,333.33)/($54,000 - $33,000)
Q = $2,293,245.61 / $21,000 = 109.20 units
b). The accounting break-even point is the number of units that must be sold to generate a net income of 0.
We can ignore taxes, because if EBIT = 0, Taxes = 0, and Net Income = 0.
EBIT = Revenue - Costs - Depreciation = Q*(Price - Variable Cost) - Fixed Costs - Depreciation = 0
Q = (Fixed Costs + Depreciation)/(Price - Variable Cost)
Q = ($595,000 + $733,333.33)/($54,000 - $33,000)
Q = $1,328,333.33 / $21,000 = 63.25 units
c). The financial break-even point is the number of units that must be sold to generate a NPV of 0.
First, calculate the Operating Cash Flow that results in a NPV of 0.
NPV = -$4,400,000 + [OCF * {(1 - 1.15-6) / 0.15}] = 0
OCF = [$4,400,000*0.15] / [1 - 1.15-6]
OCF = $660,000 / 0.5677 = $1,162,642.39
Next, determine the quantity that must be sold to achieve the calculated OCF.
Operating Cash Flow = [{Q*(Price - Variable Cost)} - Fixed Costs - Depreciation]*(1 - Tax Rate) + Depreciation
$1,162,642.39 = [{Q * ($54,000 - $33,000)} - $595,000 - $733,333.33] * (1 - 0.24) + $7,333,333.33
Q = [{($1,162,642.39 - $733,333.33)/(1-0.24)} + $595,000 + $733,333.33)/($54,000 - $33,000)
Q = $1,893,213.67 / $21,000 = 90.15 units
