Calculate the accounting break-even level of sales in dollar

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Reference no: EM131972231

At Macrohard, Inc. the cost of secret project X is $100,000. According to a confidential management report, the following can be expected in each of the five years of the machine's life.

Year 0 Years 1-5

Investment--------------------------------$100,000

Sales -------------------------------------------------------------------------$350,000

Variable costs@ 77% --------------------------------------------------- 269,500

Fixed costs ------------------------------------------------------------------- 30,000

Depreciation--------------------------------------------------------------------20,000

Pretax Profit--------------------------------------------------------------------30,500

Taxes @ 40%------------------------------------------------------------------12,200

After-tax Profits---------------------------------------------------------------18,300

Cash Flows ------------------------------------------------------------------- 38,300

Assume the cost of capital is 10%.

NPV = $45,187

a. What if the price of the machine turns out to be $120,000 instead of $100,000 (assume straight line depreciation)? What happens to net present value?

b. Instead, what if the economy booms and sales come in at $450,000 per year (variable costs remain at 77% of sales)? What happens to net present value?

c. Calculate the accounting break-even level of sales in dollars.

d. Calculate the break-even level of sales in units if the price per unit is $35:

e. Assume that a rival (Gill Bates, Inc.) is working on a similar project. If they can develop their product, you project that your sales estimate will be 10% lower than originally thought and that your variable costs will rise to 78.5% of sales due to higher promotional costs. Should you go ahead with the project?

Reference no: EM131972231

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