# Break Even, Cash Flow, and After Tax Net Income

Problem 16-3

Mike Solid started a pizzeria in 1999. For this purpose he rented a building for $1,800 per month. Two persons were hired to work full time at the restaurant and six college students were hired at work 30 hours per week delivering pizza. An outside accountant was hired for tax and bookkeeping purposes at a cost of $900 per month. The necessary restaurant equipment and delivery cars were purchased with cash. Mr. Solid has noticed that expenses for utilities and supplies have been rather constant.

Mr. Solid increased his business between 1999 and 2001. Profits have more than doubled since 1999. Mr. Solid does not understand why his profits have increased faster than his volume.

A projected income statement for 2002 has been prepared by the accountant and is shown below:

Projected Income Statement

For the year ended December 31, 2002

Sales $308,000

Cost of food sold $92,400

Wages & fringe benefits of restaurant help 26,650

Wages and fringe benefits of delivery persons 54,100

Rent 15,500

Accounting services 10,900

Depreciation of delivery equipment 16,000

Depreciation of restaurant equipment 8,000

Utilities 7,165

Supplies (soap, floor wax, etc) 10,645 241,360

Income before taxes 66,640

Income taxes 19,992

Net income $46,648

Note: The average pizza sells for $8.50. Assume Mr. Solid pays out 30 percent of his income in income taxes.

Required:

a. What is the break even point in number of pizzas that must be sold?

b. What is the cash flow break even point in number of pizzas that must be sold?

c. If Mr. Solid withdraws $14,400 for personal use, how much cash will be left from the 2002 income producing activities?

d. Mr. Solid would like an after tax net income of $60,000. What volume must be reached in number of pizzas in order to obtain the desired income?

e. Briefly explain to Mr. Solid why his profits have increased at a faster rate than his sales.

f. Briefly explain to Mr. Solid why his cash flow for 2002 will exceed his profits.

https://brainmass.com/business/accounting/break-even-cash-flow-after-tax-net-income-340375

#### Solution Summary

Break even, cash flows and after tax net income is examined.

leasing vs buying, break-even analysis

5.4

You want to buy a new car, but you're not sure whether you should lease it or buy it. You can buy it for $50,000, and you expect that it will be worth $20,000 after you use it for 3 years. Alternatively, you could lease it for payments of $650 per month for the 3-year term, with the first payment due immediately. The lease company did not tell you what interest rate they're using to calculate the monthly payments, but you know you could borrow money from your banker at an annual percentage rate (APR) of 8%.

A. Calculate the present value of the lease payments, assuming monthly compounding at the given APR of 8%.

B. Calculate the present value of the $20,000 salvage value, again using monthly compounding and the given APR of 8%. Which option do you prefer, lease or buy?

C. Calculate the amount of the salvage value which would make you indifferent between leasing and buying.

D. If you were able to use this car 100% for business, rendering the lease payments tax-deductible, or alternatively, allowing you to deduct depreciation using straight-line depreciation (depreciated to expected salvage value) and assuming your tax rate is 40%, would you prefer to buy or lease the car?

6.1 You and your friends are thinking about starting a motorcycle company named Apple Valley Choppers. Your initial investment would be $500,000 for depreciable equipment, which should last 5 years, and your tax rate would be 40%. You could sell a chopper for $10,000, assuming your average variable cost per chopper is $3000, and assuming fixed costs, such as rent, utilities and salaries, would be $200,000 per year.

A. Accounting breakeven: How many choppers would you have to sell to break even, ignoring the costs of financing?

B. Financial breakeven: How many choppers would you have to sell to break even, if you required a 15% return? (Hint: Use the 15% as the discount rate and calculate net present value. In Excel, you may want to use the Goal Seek command, or simply use trial and error to find the correct amount.)

C. Assuming you could sell 60 choppers per year, what would be your IRR?

D. Assuming you could sell 60 choppers per year, what would your selling price have to be to generate a net present value of $150,000 at a 15% discount rate?

E. If you could sell 60 choppers in the first year, and your sales volume increased by 5% each year until the end of year 5, what would the net present value be at a 15% discount rate?

F. If you need to invest working capital equal to 10% of the next (coming) year's sales revenue, what would be the effect on the net present value of the project? Do you think that working capital investments always reduce the net present value of projects? (Assume a 15% discount rate, and sales volume increases by 5% each year.)

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