7. XYZ Co. is evaluating whether to invest in a project with the following information:...
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7. XYZ Co. is evaluating whether to invest in a project with the following information: (8 points total)
Project cost = $950,000
Project life = five years
Projected number of units sold per year = 10,000
Projected price per unit = $200
Projected variable cost per unit = 150
Fixed costs per year = $150,000
Required rate of return = 15%
Marginal tax rate = 35%
Assume straight-line depreciation to zero over five years, and ignore the half-year rule for accounting for depreciation.
a. Calculate the cash break-even sales quantity for this project. (1 mark)
b. Calculate the accounting break-even sales quantity for this project. (1 mark)
c. Calculate the financial break-even sales quantity for this project. (3 marks)
d. Calculate the Degree of Operating Leverage (DOL) at the cash break-even, accounting break-even, and financial break-even sales quantities. (3 marks)
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