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Assume we have a following project:

Net cost of new equipment $ $1,100,000$

Life of new equipment $10$ years

No Salvage value

Straight line depreciation

Forecasted sales volume $9,000$ units per year

Expected sales price of new product $ $58$ per unit

Variable cost of production $ $28$ per unit

Fixed operating costs $($excluding depreciation$)$ $ $155,000$ per year

Taxes are $30\%$ and the cost of capital is $15\%$

Your financial analyst calculated the break$-$even sales to be $8,833\mathrm{.}3$ units $($trust him, it is correct$).$ He says

that since sales are expected to be $9,000$ units and because the project is expected to generate net

income of $ $30,000$ a year, it should be accepted.

Revenue at $90,000$ units $$522,000$

less: variable costs $252,000$

fixed costs $155,000$

depreciation $110,000517,000$

gross income $5,000$

taxes $1,500$

Net Income $ $3,500$

a$.$ Calculate the NCF and BOTH the net present value and the internal rate of return at $9,000$ units. $($be

careful calculating the net cash flows from the income statement, this is not a trick question$)$

NCF $$113,500$; NPV: $$-530,369\mathrm{.}76$; IRR $0\mathrm{.}57\%$

b$.$ Would you recommend accepting or rejecting this project? Why?

Reject, Because the NPV is negative. IRR is less than cost of capital.

c$.$If you feel that $8,833$ units is not the appropriate breakeven quantity, calculate what it should be$?$

$14032\mathrm{.}25$

d$.$ If there is a different breakeven quantity, what is the major issue causing the difference?

$8833\mathrm{.}33$ is accounting breakeven method. $14032\mathrm{.}25$ is financial breakeven method.