Question

Consider a project with the following data: accounting break-even quantity = 16,700 units; cash break-even quantity = 15,000 units; life = four years; fixed costs = $150,000; variable costs = $32 per unit; required return = 15 percent. Ignoring the effect of taxes, find the financial break-even quantity. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer: 17381.80 units

Explanation:

To solve the question, the OCF need to be known. To solve this, we need to know the price of the project which will be:

15000 = $150,000/(P - $32)

15000P - 480000 = 150000

15000P = 150000 + 480000

15000P = 630000.

P = 630000/150000

P = 42

Since we know the price, we'll calculate depreciation which will be:

16700 = ($150,000 + D)/($42 -$32)

Depreciation = 17000

Based on the information, initial investment will now be:

= 4 × 17000

= 68000

Then, we can now solve the OCF which will be:

68000 = OCF(PVIFA15%,4)

OCF = 23818.04

Therefore, the financial breakeven quantity will be:

= 150,000 + 23818.04/(42-32)

= (150000 + 23818.04)/10

= 173818/10

= 17381.80 units

Therefore, the financial breakeven quantity is 17381.80 units