The management of Dior Corp. is planning to invest in a machine which has a four-year life. The initial investment of the project is $8,000, the annual addition to working capital is equal to $4,000. The fixed cost would be $4,000. The unit contribution margin is $15. The firm's marginal tax rate is 35%. The present value of net non-recurring investments would be $18,928. FCF_t is $5,971.Compute the economic break even. (Round your intermediate calculation to whole dollar amount and final answer to the nearest whole unit.) A) 1,218 units B) 1,305 units C) 1,280 units D) 1,880 units

Question

Quizplus · Accepted Answer

The economic break-even point is the level of output at which the present value of the future cash flows equals the initial investment. In this case, the initial investment is $8,000, the annual addition to working capital is $4,000, the fixed cost would be $4,000, the unit contribution margin is $15, the firm's marginal tax rate is 35%, and the present value of net non-recurring investments would be $18,928. The FCFt is $5,971.The economic break-even point can be calculated using the following formula:```Economic break-even point = (Initial investment + Present value of net non-recurring investments) / Unit contribution margin```In this case, the economic break-even point is:```Economic break-even point = ($8,000 + $18,928) / $15 = 1,880 units```Therefore, the correct answer is D) 1,880 units.

The Management of Dior Corp