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Present Value break-even point

Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of five years. The depreciation schedule for the machine is straightline with no salvage value. The machine costs $300,000. The sales price per pair of shoes is $60, while the variable cost is $8. $100,000 of fixed cost per year is attributed to the machine.

Assume that the corporate tax rate is 34 percent and the appropriate discount rate is 8 percent. What is the present value break-even point?

Solution Preview

When calculating the present value break-even point, express the initial investment of $300,000 as an equivalent annual cost (EAC). Divide the initial investment by the five -year annuity factor, discounted at 15 percent. The EAC incorporates the opportunity cost of the investment.

EAC = Initial Investment / ATr
= $300000 / A50.o8 ...

Solution Summary

This explains the steps to compute the present Value break-even point for High Flight