Question

Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of six years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $750,000. The sales price per pair of shoes is $61, while the variable cost is $15. $175,000 of fixed costs per year are attributed to the machine. Assume that the corporate tax rate is 35 percent and the appropriate discount rate is 9 percent.

Required:
What is the financial break-even point?

Answer 1

7812.60 units

Step-by-step explanation:

PVIFA 9%,6years = [1-(1+r)-n/r]

=[1-(1-1.09)^-6]/0.09

= 4.4859

EAC = Initial Investment / PVIFA 9%,6year

EAC = $750,000/ 4.4859

EAC= $167,190.53

Annual depreciation = $750,000 / 6

Annual depreciation = $125,000

The financial Break-even point for this project is: QF = [EAC + FC(1 – tC) – Depreciation(tC)] / [(P – VC)(1 – tC)]

Break-even point =[167,190.53 + 175,000*(1-0.35) - 125,000*0.35]/(61-15)(1-0.34)

Break-even point = {167,190.53 + 113750 - 43750} / 30.36

Break-even point = 237190.53 / 30.36

Break-even point = 7812.59980

Break-even point = 7812.60 units