FINC 312 questions

Quiz No.4 Name______________________

AFM Co. proposes to invest $8 million in a plant that manufactures financial calculators. The plant’s economic life is 4 years. The company uses a straight-line depreciation schedule, and all $8 million of initial investment will be depreciated. A financial calculator costs $9 per unit to produce and will be sold for $24 per unit. Fixed costs are $3 million a year. The cost of capital is 20%. The company’s tax rate is 40%. Assume there are no working capital changes.

a. What is the PV-based breakeven number of units sold per year?

b. What is the accounting-based breakeven number of units sold per year?