question archive The economic life of the machine we purchased for 6,000,000 TL is 5 years, the depreciation method is linear, cost of capital is 20%, and the tax rate is 20%
The economic life of the machine we purchased for 6,000,000 TL is 5 years, the depreciation method is linear, cost of capital is 20%, and the tax rate is 20%
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The economic life of the machine we purchased for 6,000,000 TL is 5 years, the depreciation method is linear, cost of capital is 20%, and the tax rate is 20%. The project (this machine) will have 0 TL salvage value after 5 years. We are informed that projected revenues for the next 5 years are 4,200,000 TL per year, variable costs are 25 percent of the projected revenue, projected fixed costs are 600,000 TL per year for the next 5 years.
Accordingly, calculate the amount of revenues from a point of accounting (10 points) and finance break-even analyses.
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Investment (Year 0) |
Cash Flows in years 1-5 Projected |
Accounting Break-Even |
Financial Break - Even |
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Initial Investment |
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Revenues |
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Costs |
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Variable Costs |
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Fixed Costs |
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Depreciation |
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Pretax Profit |
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Tax (20%) |
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Profit After Tax |
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Cash Flow from Operations(CFFO) |
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The calculations of cashflows is shown below
| Investment (year 0) | Cashflow in years 1-5 | ||
| Initial Investment | 6000000 | ||
| Revenues | 4200000 | ||
| Costs | |||
| Variable Costs | 1050000 | ||
| Fixed costs | 600000 | ||
| Depreciation | 1200000 | ||
| Pre-tax profit | 1350000 | ||
| Tax(20%) | 270000 | ||
| Profit after tax | 1080000 | ||
| Cashflow from operations (CFFO) | 2280000 |
The Accounting breakeven occurs when the Pretax profit or After tax profit =0
Let R be the accounting breakeven revenue level
Pretax profit = (R-0.25*R)-600000 - 1200000 = 0
=> R = 1800000/0.75 = 2400000
So, Accounting breakeven occurs when Revenues are TL 2,400,000 per year
NPV of the project = -6000000 + 2280000/0.2*(1-1/1.2^5) = TL 818595.68
So, the project is good enough to be taken up
Financial breakeven occurs when NPV = 0
Let S be the financial breakeven Revenues
CFFO = ((R-0.25*R)-600000-1200000)*(1-0.2)+1200000
=0.6*R -240000
NPV = -6000000+(0.6*R-240000)/0.2*(1-1/1.2^5) = 0
=> 0.6*R-240000 = 2006278.22
R =3743797.03
So, Financial breakeven occurs when Revenues are TL 3,743,797.03 per year
