Fin 419 Week 5 Team Assignment with Answers

1091 WordsNov 18, 20115 Pages
Principles of Managerial Finance FIN/419 P12.4 Break even analysis. Barry Carter is considering opening a music store. He wants to estimate the number of CDs he must sell to break even. The CDs will be sold for $13.98 each, variable operating costs are $10.48 per CD, and annual fixed operating costs are $73,500. A) Find the operating breakeven point in number of CDs. Q= FC / P- VC Q= 73,500 / 13.98 – 10.48 Q= 21,000 CDs B) Calculate the total operating costs at the breakeven volume found in part a. EBIT= Q x (P – VC) – FC EBIT= 21,000 x (13.98 – 10.48) – 73,500 EBIT= 21,000 x 3.5 – 73,500 EBIT= 0 C) If Barry estimates that at a minimum he can sell 2,000 CDs per month, should he go…show more content…
To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease and purchase plans are as follows: Lease The leasing arrangement requires end-of-year payments of $19,800 over 5 years. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $24,000 at termination of the lease. Purchase If the firm purchases the machine, its cost of $80,000 will be financed with a 5-year, 14% loan requiring equal end-of-year payments of $23,302. The machine will be depreciated under MACRS using a 5-year recovery period. (See Table 3.2 on page 108 for the applicable depreciation percentages.) The firm will pay $2,000 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its 5-year recovery period. a. Determine the after-tax cash outflows of Northwest Lumber under each alternative. Year | Lease after-tax outflows | Purchase after-tax outflows | 1 | $11,880 | $13,622 | 2 | 11,880 | 10,459.71 | 3 | 11,880 | 15,391.10 | 4 | 11,880 | 18,512.89 | 5 | 35,880 | 19,516.93 | b.

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