Break-Even and Taxes (LO3] Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $54,000 per boat. The variable costs will be about half that, or $33,000 per boat, and fixed costs will be $595,000 per year. The total investment needed to undertake the project is $4,400,000. This amount will be depreciated straight-line to zero over the 6-year life of the equipment. The salvage value is zero, and there are no working capital consequences. Wettway has a required return of 15 percent on new projects. OCF-TcxD FC + Q== 1-TC P- Use the above expression to find the cash, accounting, and financial break-even points for Wettway Sailboat. Assume a tax rate of 24 percent. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. Cash break-even Accounting break-even Financial break-even 28.33% 63.25 90.15

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cancinodavidq cancinodavidq · Answer 1 · 2019-12-09T16:36:41+01:00

Answer:

Check the following calculations

Explanation:

a). Depreciation = Cost of the project / Useful life years = $4,400,000 / 6 = $733,333.33

Operating Cash Flow = EBIT - Tax + Depreciation

[{Q*(Price - Variable Cost)} - Fixed Costs - Depreciation]*(1 - Tax Rate) + Depreciation = 0

Q = [{-Depreciation/(1 - Tax Rate)} + Fixed Costs + Depreciation]/(Price - Variable Cost)

Q = [{-$733,333.33/(1-0.24)} + $595,000 + $733,333.33)/($54,000 - $33,000)

Q = $2,293,245.61 / $21,000 = 109.20 units

b). The accounting break-even point is the number of units that must be sold to generate a net income of 0.

We can ignore taxes, because if EBIT = 0, Taxes = 0, and Net Income = 0.

EBIT = Revenue - Costs - Depreciation = Q*(Price - Variable Cost) - Fixed Costs - Depreciation = 0

Q = (Fixed Costs + Depreciation)/(Price - Variable Cost)

Q = ($595,000 + $733,333.33)/($54,000 - $33,000)

Q = $1,328,333.33 / $21,000 = 63.25 units

c). The financial break-even point is the number of units that must be sold to generate a NPV of 0.

First, calculate the Operating Cash Flow that results in a NPV of 0.

NPV = -$4,400,000 + [OCF * {(1 - 1.15-6) / 0.15}] = 0

OCF = [$4,400,000*0.15] / [1 - 1.15-6]

OCF = $660,000 / 0.5677 = $1,162,642.39

Next, determine the quantity that must be sold to achieve the calculated OCF.

Operating Cash Flow = [{Q*(Price - Variable Cost)} - Fixed Costs - Depreciation]*(1 - Tax Rate) + Depreciation

$1,162,642.39 = [{Q * ($54,000 - $33,000)} - $595,000 - $733,333.33] * (1 - 0.24) + $7,333,333.33

Q = [{($1,162,642.39 - $733,333.33)/(1-0.24)} + $595,000 + $733,333.33)/($54,000 - $33,000)

Q = $1,893,213.67 / $21,000 = 90.15 units