Question

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $9,300 and sell its old washer for $2,000. The new washer will last for 6 years and save $2,200 a year in expenses. The opportunity cost of capital is 12%, and the firm's tax rate is 21%.

a. If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project in years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amounts should be indicated by a minus sign.)
b. What is project NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c. What is NPV if the firm investment is entitled to immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Annual operating cash flow in year 0 Annual operating cash flow in years 1 to 6 NPV.

Answer 1

To break even, Crystal Clear needs to sell 75 units of their smallest greenhouse per month, calculated by dividing the fixed costs of £25,500 by the contribution margin of £340 (£400 selling price - £60 variable cost).

Step-by-step explanation:

Break-Even Analysis

To calculate the number of smallest greenhouses needed to be sold for Crystal Clear to break even, we need to apply the break-even formula which is the fixed costs divided by the selling price minus the variable cost per unit.

In this case, the fixed costs are £25,500, the selling price of each greenhouse is £400, and the variable cost is £60. The formula would therefore be: Break-Even Quantity = £25,500 / (£400 - £60).

After performing the calculation, the result is:

• Break-Even Quantity = £25,500 / £340
• Break-Even Quantity = 75 greenhouses

Therefore, Crystal Clear needs to sell 75 of the smallest greenhouses to break even every month.