In early 1990, Boeing Co. decided to gamble $4 billion to build a new long-dista
ID: 2709303 • Letter: I
Question
In early 1990, Boeing Co. decided to gamble $4 billion to build a new long-distance, 350-seat wide-body airplane called the Boeing 777. The price tag for the 777, scheduled for delivery beginning in 1995, is about $120 million apiece. Assume that Boeing’s $4 billion investment is made at the rate of $800 million a year for the years 1990 through 1994 and that the present value of the tax write-off associated with these costs is $750 million. Based on estimated annual fixed costs of $100 million, variable production costs of $90 million apiece, a marginal corporate tax rate of 34 percent and a discount rate of 14 percent, what is the break-even quantity of annual unit sales over the Boeing 777’s projected 15-year life? Assume that all cash inflows and outflows occur at the end of the year.
Explanation / Answer
Answer:
Year 0 we need to bring all the future cost to be incurred in present value and then calculate the no of quantity to be sold for break even
Therefore the present value for initial cost is given as $750 million
Present value of variable cost = (90*Present value annuity factor for 14% 15 years )
therefore = $90*6.1422 = $552million = 552*.66= 364
Fixed cost = $100*6.1422 = $614.22milllion = 614*.66 = 405
Total cost present value = $1519 million
To calculate the break even of units = Fixed cost / Contribution per unit
= 614.22/30 = 20.5 units = 21 units is the break even over 15 years since there is no change in fixed and variable cost
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