Problem 11-29 Break-Even Analysis [LO3] This problem concerns the effect of taxe
ID: 2761937 • Letter: P
Question
Problem 11-29 Break-Even Analysis [LO3]
This problem concerns the effect of taxes on the various break-even measures. Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $5,400,000 investment in threading equipment to get the project started; the project will last for six years. The accounting department estimates that annual fixed costs will be $800,000 and that variable costs should be $350 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the six-year project life. It also estimates a salvage value of $280,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $450 per ton. The engineering department estimates you will need an initial net working capital investment of $520,000. You require a 16 percent return and face a marginal tax rate of 30 percent on this project.
Calculate the accounting, cash, and financial break-even quantities. (Do not round intermediate calculations and round your final answers to the nearest whole number. (e.g., 32))
This problem concerns the effect of taxes on the various break-even measures. Consider a project to supply Detroit with 40,000 tons of machine screws annually for automobile production. You will need an initial $5,400,000 investment in threading equipment to get the project started; the project will last for six years. The accounting department estimates that annual fixed costs will be $800,000 and that variable costs should be $350 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the six-year project life. It also estimates a salvage value of $280,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $450 per ton. The engineering department estimates you will need an initial net working capital investment of $520,000. You require a 16 percent return and face a marginal tax rate of 30 percent on this project.
Explanation / Answer
Accounting BEP Amount Amount Amount Ans 1 Initial Investment 54,00,000.00 Less residual Value -2,80,000.00 Add: Fixed Cost Annual Fixed Cost * 6 Years) 48,00,000.00 Total Fixed Cost 99,20,000.00 Contribution=Sales Price Per Unit-VC 100 Accounting BEP=Fixed Cost/Contribution Per Unit 99,200.00 Ans 2 Cash BEP Amount Amount Initial Investment 54,00,000.00 Add: Fixed Cost net Of Tax (Annual Fixed Cost * 6 Years)*.65 31,20,000.00 Less Depreciation Tax Shield -18,90,000.00 Total Fixed Cost 66,30,000.00 Less Salvage Value Ne of Tax(280000*.65) -1,82,000.00 Total Fixed Cost 64,48,000.00 Contribution net Of Tax=Sales Price Per Unit-VC 65 Accounting BEP=Fixed Cost/Contribution Per Unit 99,200.00 Ans 3 Financial BEP Amount DF DCF Initial Investment -54,00,000.00 1.00 -54,00,000.00 Add: Fixed Cost net Of Tax (Annual Fixed Cost * 6 Years)*.65 3.68 -19,16,062.67 Less Depreciation Tax Shield 3.68 11,60,691.81 Total Fixed Cost -61,55,370.86 Less Salvage Value Ne of Tax(280000*.65) 0.41 74,620.00 Initial Investment in WC -540000 1 -5,40,000.00 WC Recovery 540000 0.410442255 2,21,638.82 Total Fixed Investment -63,99,112.04 Recovery towards fixed investment Year1 ( After Tax Contribution* Number Units) 40000*65 0.862068966 22,41,379.31 Year2 ( After Tax Contribution* Number Units) 40000*65 0.743162901 19,32,223.54 Year3 ( After Tax Contribution* Number Units) 40000*65 0.640657674 16,65,709.95 Total Recovery Till third year 58,39,312.80 Fixed Investment Pending for Recovery -5,59,799.24 After Tax Discounted Realisation for 4th Year Sales 0.552291098 35.89892136 No of Units in Year 4 15,594.00 Total Financial BEP 40000+40000+40000+15594 1,35,594.00