## [solution]: 11.2 In this case, we have \$200,000 in cash fixed costs to cover. Each unit contributes \$2,500 2...

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11.2    In this case, we have \$200,000 in cash fixed costs to cover. Each unit contributes \$2,500 2 1,500 5 \$1,000 toward covering fixed costs. The cash break-even is thus \$200,000y\$1,000 5 200 units. We have another \$150,000 in depreciation, so the accounting break-even is (\$200,000 1 150,000)y\$1,000 5 350 units. To get the financial break-even, we need to find the OCF such that the project has a zero NPV. As we have seen, the five-year annuity factor is 3.19935 and the project costs \$750,000, so the OCF must be such that: \$750,000 5 OCF 3 3.19935 So, for the project to break even on a financial basis, the project’s cash flow must be \$750,000y3.19935, or \$234,423 per year. If we add this to the \$200,000 in cash fixed costs, we get a total of \$434,423 that we have to cover. At \$1,000 per unit, we need to sell \$434,423y\$1,000 5 435 units.

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This question was answered on: Dec 18, 2020

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