Please solve for financial break-even quantity & DOL @ the financial break-even

Question

Please solve for financial break-even quantity & DOL @ the financial break-even level of output. The first two questions are correct.

A project has the following estimated data: price S66 per unit, variable costs $43 per unit, fixed costs - $16,500, required return 8 percent, initial investment $25,000, life five years. gnoring the effect of taxes, what is the accounting break-even quantity? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Break-even quantity 935 What is the cash break-even quantity? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Break-even quantity What is the financial break-even quantity? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Break-even quantity 0 What is the degree of operating leverage at the financial break-even level of output? (Do not round intermediate calculations. Round your answer to 3 decimal places, e.g., 32.161.) DOL

Explanation / Answer

1) Accounting break even quantity= (FC + D)/(P –v) where D is annual depreciation

D = Initial Investment /Life = 25000/5 = $5000

Accounting break even quantity = (16500 + 5000)/(66-43) = 934.78 = 935

2) Cash break even quantity = FC/(P –v) = 16500/(66-43) = 717.39 = 717

3) For financial breakeven the present value of the operating cash flows should be equal to the initial investment.

$25000 = OCF(PVIFA8%,5) = OCF*(1 - (1 + r)^-N)/r = OCF*3.9927

OCF = $6261.43

Financial break even quantity= (FC + OCF)/(P –v) = (16500+6261.43)/(66-43) = 989.63 = 990

4) DOL = 1 + FC/OCF = 1 + 16500/6261.43 = 3.64

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