60 14 14 accounting break even the quantity that

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Unformatted text preview: C – D)(1 – T) = 0 QP – vQ – FC – D = 0 Q(P – v) = FC + D Q = (FC + D) / (P – v) 15 15 Using Accounting Break-Even Accounting break-even is often used as an Accounting early stage screening number early If a project cannot break even on an If accounting basis, then it is not going to be a worthwhile project worthwhile Accounting break-even gives managers an Accounting indication of how a project will impact accounting profit accounting 16 16 Accounting Break-Even and Accounting Cash Flow Cash We are more interested in cash flow than we are in We accounting numbers accounting As long as a firm has non-cash deductions, there will As be a positive cash flow If a firm just breaks even on an accounting basis, cash If flow = depreciation flow If a firm just breaks even on an accounting basis, NPV If <0 17 17 Example Consider the following project A new product requires an initial investment of $5 million and will new be depreciated to an expected salvage of zero over 5 years be The price of the new product is expected to be $25,000 and the The variable cost per unit is $15,000 variable The fixed cost is $1 million What is the accounting break-even point each year? • Depreciation = 5,000,000 / 5 = 1,000,000 • Q = (1,000,000 + 1,000,000)/(25,000 – 15,000) = 200 units 18 18 Sales Volume and Operating Sales Cash Flow Cash What is the operating cash flow at the accounting What break-even point (ignoring taxes)? break-even OCF = (S – VC – FC - D) + D OCF = (200*25,000 – 200*15,000 – 1,000,000 -1,000,000) + OC...
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