Break-even and taxes

1. Consider a project to supply Detroit with 35,000 tons of machine screws annually for automobile production. You will need an initial $5,200,000 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 $985,000 and that variable costs should be $185 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 $500,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $280 per ton. The engineering department estimates you will need an initial net working capital investment of $410,000. You require a return of 13 percent and face a marginal tax rate of 38 percent on this project.

I. Ignore taxes.

a. Find the accounting, cash, and financial break-even quantities.

b. Find the degree of operating leverage at the base-case output level of 35,000 tons.

II. Consider taxes.

a. Find the accounting, cash, and financial break-even quantities.

b. Find the degree of operating leverage at the base-case output level of 35,000 tons.