Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Question
Chapter 7, Problem 4QAP
Summary Introduction
Adequate information:
Initial investment = $435,000
Economic Life of machine = 5 years
Selling price per unit (SP) = $16
Variable cost per unit (VC) = $5
Fixed cost (FC) = $295,000
Corporate tax rate (T) = 24% or 0.24
Discount rate (r ) = 12% or 0.12
To compute: The financial break-even point.
Introduction: The financial break-even point refers to a point where the total financial cost of the company is equal to the earnings before income and tax. In other words, it is a point where the earnings per share of the company are equal to zero.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
4. Financial Break-Even Ayden's Toys, Inc., purchased a $435,000 machine to produce toy cars. The machine will be fully depreciated by
the straight-line method over its 5-year economic life. Each toy sells for $16. The variable cost per toy is $5 and the firm incurs fixed
costs of $295,000 per year. The corporate tax rate for the company is 24 percent. The appropriate discount rate is 12 percent. What is
the financial break-even point for the project?
5. Option to Wait Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $435,000
per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine,
it will be obsolete 10 years from today. The machine is currently priced at $2.8 million. The cost of the machine will decline by
$215,000 per year until it reaches $2.155 million, where it will remain. If your required return is 9 percent, should you purchase the
machine? If…
Ayden's Toys, Incorporated, just purchased a $480,000 machine to produce toy car
The machine will be fully depreciated by the straight-line method over its 7-yea
economic life. Each toy sells for $20. The variable cost per toy is $7 and the firm incur
fixed costs of $340,000 per year. The corporate tax rate for the company is 24 percen
The appropriate discount rate is 12 percent. What is the financial break-even point fc
the project? (Do not round intermediate calculations and round your answer to
decimal places, e.g., 32.16.)
Financial break-even point
units
4. Financial Break-Even Ayden’s Toys, Inc., purchased a $435,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its 5-year economic life. Each toy sells for $16. The variable cost per toy is $5 and the firm incurs fixed costs of $295,000 per year. The corporate tax rate for the company is 24 percent. The appropriate discount rate is 12 percent. What is the financial break-even point for the project?
Chapter 7 Solutions
Corporate Finance
Ch. 7 - Forecasting Risk What is forecasting risk? In...Ch. 7 - Sensitivity Analysis and Scenario Analysis What is...Ch. 7 - Prob. 3CQCh. 7 - Break-Even Point As a shareholder of a firm that...Ch. 7 - Prob. 5CQCh. 7 - Real Options Why does traditional NPV analysis...Ch. 7 - Real Options The Mango Republic has just...Ch. 7 - Prob. 8CQCh. 7 - Prob. 9CQCh. 7 - Project Analysis You are discussing a project...
Ch. 7 - Sensitivity Analysis and Break-Even Point We are...Ch. 7 - Prob. 2QAPCh. 7 - Prob. 3QAPCh. 7 - Prob. 4QAPCh. 7 - Prob. 5QAPCh. 7 - Prob. 6QAPCh. 7 - Prob. 7QAPCh. 7 - Prob. 8QAPCh. 7 - Prob. 9QAPCh. 7 - Prob. 10QAPCh. 7 - Prob. 11QAPCh. 7 - Prob. 12QAPCh. 7 - Prob. 13QAPCh. 7 - Prob. 14QAPCh. 7 - Prob. 15QAPCh. 7 - Prob. 16QAPCh. 7 - Prob. 17QAPCh. 7 - Prob. 18QAPCh. 7 - Prob. 19QAPCh. 7 - Prob. 20QAPCh. 7 - Prob. 21QAPCh. 7 - Prob. 22QAPCh. 7 - Prob. 23QAPCh. 7 - Prob. 24QAPCh. 7 - Prob. 25QAPCh. 7 - Prob. 26QAPCh. 7 - Prob. 28QAPCh. 7 - Prob. 29QAPCh. 7 - Prob. 30QAP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings from 24,000 to 46,000 per year. The new machine will cost 80,000, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus depreciation at the time of purchase. The applicable corporate tax rate is 25%, and the firms WACC is 10%. The old machine has been fully depreciated and has no salvage value. Should the old riveting machine be replaced by the new one? Explain your answer.arrow_forwardAccounting Your firm is selling a 3-year old machine that has a 5-year class life. The machine originally cost $580,000 and required no investment in net working capital at the time of installation. Your firm is selling the asset for $180,000. Your firm's marginal tax rate is 34%. What is the cash flow effect from selling this machine?arrow_forwardAyden's Toys, Inc.. just purchased a $530,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its 5-year economic life. Each toy sells for $30. The variable cost per toy is $14 and the firm incurs fixed costs of $390,000 per year. The corporate tax rate for the company is 24 percent. The appropriate discount rate is 12 percent. What is the financial break-even point for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Financial break-even point unitsarrow_forward
- Ayden’s Toys, Inc., just purchased a $475,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its 6-year economic life. Each toy sells for $19. The variable cost per toy is $6 and the firm incurs fixed costs of $335,000 per year. The corporate tax rate for the company is 23 percent. The appropriate discount rate is 11 percent. What is the financial break-even point for the project?arrow_forwardEffective Cost of Trade Credit The D.J. Masson Corporation needs to raise $800,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net 85, and it currently pays on the 10th day and takes discounts. However, it could forgo the discounts, pay on the 85th day, and thereby obtain the needed $800,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places. %arrow_forwardAyden's Toys, Incorporated, just purchased a $515,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its 8-year economic life. Each toy sells for $27. The variable cost per toy is $9 and the firm incurs fixed costs of $375,000 per year. The corporate tax rate for the company is 21 percent. The appropriate discount rate is 9 percent. What is the financial break-even point for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Financial break-even point unitsarrow_forward
- 19 A $89,000 machine with a 7-year class life was purchased 3 years ago. The machine will now be sold for $31,000 and replaced with a new machine costing $65,000, with a 5-year class life. The new machine will not increase sales, but will decrease operating costs by $16,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the initial outlay for the project? NOTE-- ALTHOUGH THE INITIAL OUTLAY IS NEGATIVE, PLEASE ENTER YOUR ANSWER AS A POSITIVE SIGN. IN OTHER WORDS, IF YOUR ANSWER IS -10,000, ENTER IT AS 10,000. DO NOT ENTER THE DOLLAR SIGN.arrow_forwardEffective Cost of Trade Credit The D.J. Masson Corporation needs to raise $600,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 2/10, net 70, and it currently pays on the 10th day and takes discounts. However, it could forgo the discounts, pay on the 70th day, and thereby obtain the needed $600,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places. Cost of Bank loan Mary Jones recently obtained an equipment loan from a local bank. The loan is for $22,000 with a nominal interest rate of 14%. However, this is an installment loan, so the bank also charges add-on interest. Mary must make monthly payments on the loan, and the loan is to be repaid in 1 year. What is the effective annual rate on the loan (assuming a 365-day year)? Do not round intermediate calculations. Round your answer…arrow_forwardBottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $6,000 and sell its old washer for $2,000. The new washer will last for 6 years and save $1,500 a year in expenses. The opportunity cost of capital is 16%, and the firm’s tax rate is 21%. a. If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project in years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amount should be indicated by a minus sign.) b. What is project NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. What is NPV if the firm investment is entitled to immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forward
- Q. A company is considering an investment proposal to install a new milling machine. The project will cost Rs.50,000. The facility has a life expectancy of 5 years and no salvage value. The company tax rate is 40%. The firm uses the straight-line method for depreciation. The estimated earnings before tax from the proposed investment plan are as under. Year Earning before tax 1 Rs. 22,000 2 18,000 3 14,000 4 15,000 5 25,000 Compute cash flow for 5 years. Calculate: 1. Payback period2. Profitability Index3. IRR4. NPV( discount rate is 15%)5. Discounted Payback6. MIRRarrow_forwardBottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $7,800 and sell its old washer for $1,600. The new washer will last for 6 years and save $2,300 a year in expenses. The opportunity cost of capital is 17%, and the firm’s tax rate is 21%. a. If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project in years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amounts should be indicated by a minus sign.) b. What is project NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. What is NPV if the firm investment is entitled to immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forwardBottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $9,600 and sell its old washer for $3,400. The new washer will last for 6 years and save $2,900 a year in expenses. The opportunity cost of capital is 22%, and the firm’s tax rate is 21%. a. If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project in year 0? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amounts should be indicated by a minus sign.) b. What is NPV if the firm investment is entitled to immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Fundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Fundamentals Of Financial Management, Concise Edi...
Finance
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Depreciation -MACRS; Author: Ronald Moy, Ph.D., CFA, CFP;https://www.youtube.com/watch?v=jsf7NCnkAmk;License: Standard Youtube License