Question
A 10-year widget-producing project requires $36 million in upfront investment (all in depreciable assets), 30% of which is borrowed capital at an interest rate of
A 10-year widget-producing project requires $36 million in upfront investment (all in depreciable assets), 30% of which is borrowed capital at an interest rate of 6% per year. The expected widget sales are 1,000,000 widgets per year. The expected price per widget is $24 and the variable cost is $12 per widget. The fixed costs excluding depreciation are expected to be $6 million per year for ten years. The upfront investment will be depreciated on a straight line basis for the 10-year useful life of the project to zero book value. The expected salvage value of the assets is $8 million. The tax rate is 40% and the WACC applicable to the project is 15%.
Calculate the accounting Break-even point.
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