The Mini-Max Company has the following cost information on their new prospective project. Fixed costs are $200/year. (Initial investment is $700)
Variable costs: $3/unit.
Depreciation: $140/year.
Price: $8/unit.
Discount rate: 12%.
Project life: 3 years.
Tax rate: 34%.
Calculate the present value break-even point.
A) 68.00 units/year.
B) 113.27 units/year.
C) 84.42 units/year.
D) 75 units/year.

Question

Quizplus · Accepted Answer

To find the present value break-even point, we need to calculate the present value of the cash inflows and outflows for each year, and then find the year where the cumulative present value becomes zero.

The cash inflow per unit is $8, and the cash outflow per unit is the sum of variable cost and depreciation, which is $3 + ($140/3) = $51.67.

Using this information, we can create the following table:

| Year | Units sold | Cash inflow | Cash outflow | Net cash flow | Discount factor (12%) | Present value of net cash flow |
|------|------------|-------------|--------------|---------------|----------------------|--------------------------------|
| 1    | 84.42      | $673.40    | $4,364.39    | ($3,690.99)    | 0.893               | ($3,291.86)                    |
| 2    | 84.42      | $673.40    | $4,364.39    | ($3,690.99)    | 0.797               | ($2,944.01)                    |
| 3    | 84.42      | $673.40    | $4,364.39    | ($3,690.99)    | 0.712               | ($2,623.28)                    |

The present value break-even point is where the cumulative present value of net cash flow becomes zero. In this case, it occurs in year 3, so the answer is 84.42 units/year.

Therefore, the best choice is C) 84.42 units/year.

The Mini-Max Company Has the Following Cost Information on Their