Question

The Financial Calculator Company proposes to invest $12 million in a new calculator-making plant. Fixed costs are $3 million per year. A financial calculator costs $10 per unit to manufacture and sells for $30 per unit. If the plant lasts for four years and the cost of capital is 20 percent, what is the break-even level (i.e., NPV = 0) of annual sales? (Assume that revenues and costs occur at the end of each year. Assume no taxes.) Round to the nearest 1,000 units.

A. 150,000 units
B. 342,000 units
C. 382,000 units
D. 300,000 units

Answer 1

The break-even level of annual sales for the Financial Calculator Company's investment in a new calculator-making plant is 600,000 units.

Step-by-step explanation:

To calculate the break-even level of annual sales, we need to determine the number of units that need to be sold each year in order for the Net Present Value (NPV) to equal zero. In this case, the fixed costs are $3 million per year for 4 years, resulting in a total of $12 million. Additionally, the cost of manufacturing a calculator is $10 per unit and it is sold for $30 per unit. Therefore, the profit per unit is $20 ($30 - $10).

To calculate the break-even level of annual sales, we can use the following formula:

Break-even level of annual sales = Fixed costs / Profit per unit

Substituting the values, we get: $12,000,000 / $20 = 600,000 units. Therefore, the break-even level of annual sales is 600,000 units.