This problem concerns the effect of taxes on the various break-even measures. Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4,400,000 investment in threading equipment to get the project started; the project will last for three years. The accounting department estimates that annual fixed costs will be $650,000 and that variable costs should be $250 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the three-year project life. It also estimates a salvage value of $260,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $390 per ton. The engineering department estimates you will need an initial net working capital investment of $440,000. You require a return of 18 percent and face a marginal tax rate of 30 percent on this project.

Calculate the accounting, cash, and financial break-even quantities. (Do not round intermediate calculations and round your final answers to the nearest whole number, e.g., 32.)

BELOW IS AN EXAMPLE OF A SIMILIAR PROBLEM

This problem concerns the effect of taxes on the various break-even measures. Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile production. You will need an initial $2,200,000 investment in threading equipment to get the project started; the project will last for five years. The accounting department estimates that annual fixed costs will be $700,000 and that variable costs should be $400 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the five-year project life. It also estimates a salvage value of $300,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $480 per ton. The engineering department estimates you will need an initial net working capital investment of $220,000. You require a return of 15 percent and face a marginal tax rate of 38 percent on this project Calculate the accounting, cash, and financial break-even quantities. (Do not round intermediate calculations and round your final answers to the nearest whole number, e.g., 32.) Cash break-even 5,379 t 1% Accounting break-even 14,250 t 0.1% Financial break-even 18,720 t 0.1% Explanation: At the cash break-even, the OCF is zero. Setting the tax shield equation equal to zero and solving for the quantity, we get oCF 0 E ($480-400)Qc $700,000)(1 38) .38 ($2,200,000/5) QCF 5,379 The accounting breakeven is QAT [$700,000 ($2,200,000/5)] ($480-400) QA 14,250 Using the tax shield approach, the OCF is OCF ($480-400) (25,000) $700,000)(1 38) .38($2,200,000/5) OCF $973,200 And the NPV is: NPV --$2,200,000 -220,000 $973,200 15%.5) [$220,000 $300,000(1 .38)] 1.15 NPV $1,044,171.10 To calculate the sensitivity to changes in quantity sold, we will choose a quantity of 26,000. The OCF at this level of sale is: OCF ($480-400) (26,000) $700,000](1 38) .38 ($2,200,000 5) OCF $1,022,800