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#1 Joy Industries is considering an expansion
#1 Joy Industries is considering an expansion. The necessary equipment would be purchased for $19 million, and the expansion would require an additional $3 million investment in net operating working capital. The tax rate is 40%. What is the initial investment outlay?
#2 Tuff Glue Services is now in the final year of a project. The equipment originally cost $19 million, of which 75% has been depreciated. Tuff Glue can sell the used equipment today for $8 million, and its tax rate is 35%. What is the equipment's after-tax salvage value?
#3 A company's fixed operating costs are $525,000, its variable costs are $3.00 per unit, and the product's sales price is $4.50. What is the company's break-even point; that is, at what unit sales volume will its income equal its costs?
Expert Solution
1) Computation of Initial Investment Outlay:
Initial Investment Outlay = Cost of Equipment + Net Operating Working Capital
= $19 millions + $3 millions
Initial Investment Outlay = $22 millions
2) Computation of Equipment's after-tax salvage value:
Original cost of equipment = $19 million
Book value of equipment = (1-0.75) * $19 million =$4.75 million
Sale price of equipment = $8 million
Profit on sale of equipment = $8 millions -$4.75 million = $3.25 million
Tax on profit on sale of equipment = $3.25 million * 0.35 = $1.1375 millions
Equipment's after tax salvage value = Sale price of equipment - Tax on profit on sale of equipment
= $8 millions - $1.1375 millions
= $6.8625 millions
So, Equipment's after tax salvage value is $6.8625 millions.
3) Computation of Break-even Point in Units:
Selling Price per unit = $4.50
Variable Cost per unit = $3
Contribution Margin per unit = Selling price per unit - Variable Cost per unit
= $4.50 - $3
Contribution Margin per unit = $1.50
Break Even Point in Units = Fixed Cost / Contribution Margin per unit
= $525,000 / $1.50
Break Even Point in Units = 350,000 units
Therefore, Break-even point in unit sales is 350,000 units.
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