The MiniMax Company has the following cost information on it

The Mini-Max Company has the following cost information on its new prospective project: Initial investment: $700 Fixed costs are $ 200 per year Variable costs: $ 3 per unit Depreciation: $ 140 per year Price: $8 per unit Discount rate: 12% Project life: 3 years Tax rate: 34% Assume that you sell the machine for book value at the end of year 3 so there is no capital gain or loss on the initial investment. How many units per year do they have to sell to break even from an NPV standpoint?

Solution

Answer

To calculate the units to be sold to break even from NPV standpoint, we need to calculate Equivalent Annual Cost,

EAC = Initial Investment / PVAF @12% for 3 Years

PVAF @12% for 3 yaers = 2.4018312

EAC = $700 / 2.4018312

EAC = $291.444

Contribution margin per unit = Sale price – Variable cost

= $5(8 – 3)

Present value Breakeven point = [EAC + Fixed Cost (1-Tax) –Depreciation (Tax)] / Contribution Margin (1-Tax)

= [291.44 + 200(1-0.34) – 140 (0.34)] / 5 (1-0.34)

= 113.89 Units

Present value Breakeven point = 114 Units

Company needs to sell 114 units to break even from NPV standpoint