A project requires an initial fixed asset investment of $148,000,has annual fixed costs of $39,800,a contribution margin of $14.62,a tax rate of 21 percent,a discount rate of 15 percent,and straight-line depreciation over the project's 3-year life.The assets will be worthless at the end of the project.What is the present value break-even point in units per year?
A)6,086
B)7,613
C)7,504
D)7,438
E)7,911

Question

Quizplus · Accepted Answer

To find the present value break-even point in units per year, we first calculate the annual depreciation, which is the initial investment divided by the project's life: $148,000 / 3 = $49,333.33. The operating cash flow (OCF) formula is OCF = (Sales - Costs - Depreciation) * (1 - Tax Rate) + Depreciation. To break even, OCF must equal the annual payment that amortizes the initial investment at the project's discount rate over its life. The formula simplifies to finding the number of units (Q) where the present value of the inflows equals the initial investment. Given the fixed costs, contribution margin, tax rate, and depreciation, we solve for Q in the equation that sets the present value of the inflows equal to $148,000. The correct calculation involves finding the Q that satisfies this condition, considering the tax shield from depreciation and the contribution margin per unit. The calculation involves detailed financial analysis, which leads to the correct answer of 7,438 units per year, taking into account the specifics of the project's cash flows, depreciation, and the discount rate.

A Project Requires an Initial Fixed Asset Investment of $148,000,has