Question

Problem 11-25 Break-Even and Taxes [L03] Wettway Sallboat Corporation is considering whether to launch its new Margo-class sallboat. The selling price will be $43,000 per boat. The vartable costs will be about half that, or $22,000 per boat, and fixed costs will be $485.000 per year. The total Investment needed to undertake the project is $3,300.000. This amount will be depreclated straight-line to zero over the 7-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Wettway has a required return of 13 percent on new projects. Use the above expression to find the cash, accounting, and financial break-even points for Wettway Sallboat. Assume a tax rate of 23 percent. (Do not round intermediate calculations and round your answers to 2 declmal places, e.g., 3216.) Cash break-even Aeoounting break-even

Answer 1

1-	selling price		43000
	variable cost		22000
	contribution	43000-22000	21000
	fixed cost		485000
	annual depreciation = 3300000/7		471428.5714
	total fixed cost	485000+471428.57	956428.57
	accounting break even point in units = total fixed cost/contribution margin per unit	956428.57/21000	45.54
2-	cash break even point = fixed cost/contribution margin per unit	485000/21000	23.10
3-	financial break even point = (fixed cost + OCF)/contribution margin per unit	(485000+612472.16)/21000	52.26
	To find the financial break-even we have to calculate the sales level that results in a zero NPV	NPV = Initial cash flow+present value of operating cash flow	0 = -3300000+PVAF (at13% for 7 year)*OCF	0 = -3300000+OCF*5.388	OCF = 3300000/5.388 = 612472.16
	PVAF at 13% for 7 Years	1-(1+r)^-n /r	1-(1.07)^-7 /.07 =.3772/.07	5.388571429
	0.622749742
	0.377250258
			612472.1604