This problem concerns the effect of taxes on the various break-even measures. Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production. You will need an initial $3,400,000 investment in threading equipment to get the project started; the project will last for four years. The accounting department estimates that annual fixed costs will be $800,000 and that variable costs should be $180 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the four-year project life. It also estimates a salvage value of $620,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $300 per ton. The engineering department estimates you will need an initial net working capital investment of $340,000. You require a return of 11 percent and face a marginal tax rate of 38 percent on this project.
Calculate the accounting, cash, and financial break-even quantities.
Cash break-even:
Accounting break-even:
Financial break-even: