Please answer this question. It has 4 parts a,b,c,d. Please answer all of them.
ID: 2651846 • Letter: P
Question
Please answer this question. It has 4 parts a,b,c,d. Please answer all of them. and explain your answer
A project has the following estimated data: price = $65 per unit; variable costs = $33 per unit; fixed costs = $4,000; required return = 16%; initial investment = $9,000;
life = three years.
Ignore the effect of taxes and assume straight-line depreciation to zero.
a) What is the accounting break-even quantity?
b) What is the cash break-even quantity?
c) What is the financial break-even quantity?
d) What is the degree of operating leverage at the financial break-even level of output?
Explanation / Answer
The accounting breakeven for the project is: Q
QA = [$4,000 + ($9,000/3)]/($65 – 33) = 219
And the cash breakeven is: Q
QC = $4,000/($65 – 33) = 125
At the financial breakeven, the project will have a zero NPV. Since this is true, the initial cost of the project must be equal to the PV of the cash flows of the project. Using this relationship, we can find the OCF of the project must be:
NPV = 0 implies $9,000 = OCF(PVIFA16%,3)
OCF = $4,007.32
Using this OCF, we can find the financial breakeven is:
QF = ($4,000 + $4,007.32)/($65 – 33) = 250
And the DOL of the project is:
DOL = 1 + ($4,000/$4,007.32) = 1.998