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Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has...

Question:

Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of six years. The depreciation schedule for the machine is straight-line with no salvage value. The machine costs $714,000. The sales price per pair of shoes is $61, while the variable cost is $15. $169,000 of fixed costs per year are attributed to the machine. Assume that the corporate tax rate is 35 percent and the appropriate discount rate is 9 percent. What is the financial break-even point?

Financial Break Even Point:

Financial Break Even Point is the sales level at which npv is zero. At this sales level, all fixed cost is recouped. After the break even point, all sales directly contribute to profits. Thus lower the financial break even point sales level, better it is for the company.

Answer and Explanation:

Machine cost = $ 714,000

Depreciation= $ 714,000/6 = $ 119,000

Let no. Of units to be sold be x

Sales= 61x

Less :Variable cost = 15x

Less: Fixed cost= 169,000

Less: Depreciation= 119,000

Operating Income=46x - 388,000

Operating Income after tax = (46x - 388,000)(1-0.35)= 29.9x -252,200

Cash inflows for year 1-6 = 29.9x -252,200 + 119,000 = 29.9x -133,200


PV of cash inflow at 9% is (29.9x -133,200)*PVAF(9%,6) = (29.9x-133,200)*4.4859

Pv of cash outflow=714,000

At NPV= 0

714000 - (29.9x-133,200)*4.4859=0

Thus, x= 9778.11

Financial break even level is achieved at 9779 units sales level


Learn more about this topic:

How to Calculate Net Present Value: Definition, Formula & Analysis

from Financial Accounting: Help and Review

Chapter 5 / Lesson 20
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