Question: Newcombe & Associates, Inc. is considering the introduction of a new product. Production of the new product requires an investment of $140,000 in equipment that has a five-year life. The equipment has no salvage value at the end of five years and will be depreciated on a straight-line basis. Newcombe's required return is 15%, and the tax rate is 34%. The firm has made the following forecasts:
|
Base Case |
Lower Bound |
Upper Bound |
| Unit Sales |
2,000 |
1,800 |
2,200 |
| Price Per Unit |
$55 |
$50 |
$60 |
| Variable Costs Per Unit |
$22 |
$21 |
$23 |
| Fixed Costs Per Year |
$10,000 |
$9,500 |
$10,500 |
1. Assume the base-case forecasts for the Newcomb project. Compute the accounting break-even point.
2. Assume the base-case forecasts and no taxes for the project. Compute the cash break-even point.
3. Assume the case-case forecasts and no taxes for the project. Compute the financial break-even point.
4. Suppose that sales for the project under consideration by Newcombe increases from 2,000 units to 2,200 units per year. Compute the DOL for project at sales of 2,000 unites. Use both the definition of the DOL and its algebraic equivalent. Assume Newcome pays no taxes on this project.