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Homework answers / question archive / Departement de science économique Department of Economics ENGINEERING ECONOMICS ECO 1192B Yellow Assignment #2: Breakeven Analysis C
Departement de science économique
Department of Economics
ENGINEERING ECONOMICS
ECO 1192B
Yellow Assignment #2: Breakeven Analysis
C. Theoret Winter 2021
A. Assignment Instructions
1. Completing an unallocated assignment will result in a zero (0%) score.
2. You will submit your assignment #2 answers on Brightspace on April 1 between 7 and 7:30 pm (Ottawa, Ontario time).
3. Assignment answers submitted late or by other means will be rejected.
4. The sequence of assignment questions in this document will be maintained on April 1 (i.e., no question scrambling)
5. Where appropriate
6. Please consult Background Paper #25 on Brightspace for assistance or discuss specific issues during my weekly office hour.
Please note that this assignment has two sections:
(You may wish to consult Background Paper #25 for Section B).
Section A: Toledo Company revenues, costs and profits
(Questions 1 to 13)
Toledo Company manufactures and sells medical equipment throughout
Canada. Its total revenue and cost functions are given below:
(Q = equipment production)
1. Total fixed cost is
2. The lower (smaller) breakeven level in a production range from 0 to 50 units of equipment is
3. The higher (bigger) breakeven level in a production range from 0 to 50 units of equipment is
4. Total profits ($) are maximized at a production level of
5. Total variable costs at the profit maximizing production level are between
6. Total production costs at the profit maximizing production level are between
7. Total revenues at the profit maximizing production level are
8. Total profits at the profit maximizing production level are
9. At the profit-maximizing production level, the vertical distance between the total revenue and total cost curves is
10. The average variable cost (variable cost per unit) of equipment at the profit-maximizing production level is
11. The average (total) cost per unit produced at profit-maximizing production level is
12. The revenue per unit produced and sold at the profit-maximizing production level is
13. Profit per unit sold at the profit-maximizing production level (all production is sold) is
Section B: Annual Equivalent Revenue Requirement
(Questions 14 to 19)
Your decision to purchase a small business depends on the annual equivalent revenue (AER) required to meet all expenses (operating, taxes, return on capital, repayment of debt) given the values of parameters such as the inflation rate, the debt ratio, the return anticipated on your investment as shown in the following
Table.
iaf = r(idf)(1-t)+(1-r)[(1+ie)(1+if)-1]
Where
1. iaf = inflation-adjusted after-tax cost of debt and owner-provided capital
2. id = inflation-free before-tax cost of debt capital
3. idf = inflation-adjusted before-tax cost of debt capital
4. ie = cost of equity (owner) capital
5. if = inflation rate
6. r = debt ratio
7. t = tax rate
8. SV=Gross salvage value (i.e., SV before taxes)
9. NSV=SV adjusted for taxes on recaptured depreciation and capital gains (as required) where
NSV=SV- taxes on recaptured depreciation-taxes on capital gains (as required)
Use the following equation:
AER =AEOC+[P(A/P, iaf,N)-NSV(A/F,iaf,N)-t(AED)]/(1-t)
AEOC=annual equivalent operating expenses
AED = Annual Equivalent Depreciation
AER = pre-tax annual revenues required to meet annual expenses
Reminder: The net salvage value (NSV) is the after-tax salvage value (SV) for relevant income taxes (if any) due to capital gains, recaptured depreciation or terminal loss.
1. Initial Cost or Purchase Price ($) 500,000
2. Projected Salvage Value ($) 50,000
3. Useful life (years) 5
4. Annual Operating Cost ($) at EOY1 60,000
14. Inflation rate (if)=0%; r=0%; t=0%; ie=8%. MARR (=iaf) for this business environment is
15. Inflation rate (if)=0%; r=0%; t=0%; ie=8%. The annual equivalent revenue (AER) for this business environment is
16. Inflation rate (if)=0%; t=0%; r=50%; id=12%; ie=8%. If you needed to borrow 50% of the required capital (i.e., 50% of $500,000), MARR (=iaf) for this business environment would be
17. Inflation rate (if)=0%; t=40%; r=50%; id=12%; ie=8%. If you borrowed 50% of the required capital, the AER (see formula above) would be
18. Inflation rate (if)=10%; t=40%; r=50%; id=12%; ie=8%; annual operating costs are fully responsive to the inflation rate. MARR (=iaf) for this business environment would be
19. Inflation rate (if)=10%; t=40%; r=50%; id=12%; ie=8%; annual operating costs are fully responsive to the inflation rate. AER for this business environment would be
Questions 20 and 22
Use the following equation:
AER =AEOC + [P(A/P,iaf,N)CTF-SV(A/F,iaf,N)CSV] / (1-t)
AEOC=annual equivalent operating expenses
AER = pre-tax annual revenues required to meet annual expenses
Note that, in the capital factor equation, SV must not be adjusted for neither recaptured depreciation nor capital gains.
The CSV factor automatically accounts for any depreciation recapturing. However, an additional term is needed to account for any after-tax capital gains (NCG) as shown in the following equation.
AER =AEOC + [P(A/P,iaf,N)CTF-SV(A/F,iaf,N)CSV
-NCG(A/F,iaf,N)] / (1-t)
5. Initial Cost or Purchase Price ($) 500,000
6. Projected Salvage Value ($) 50,000
7. Useful life(years) 5
8. Annual Operating Cost ($) at EOY1 60,000
20. Inflation rate=10%; t=40%; r=60%; id=12%; ie=8%; annual operating costs are fully responsive to the inflation rate. Based on capital tax factor (CTF) approach (see equation in Table above), the AER for this business environment would be
21. Inflation rate=10%; t=40%; r=75%; id=12%; ie=8%; annual operating costs are fully responsive to the inflation rate. Based on capital tax factor (CTF) approach (see equation in Table above), the AER for this business environment would be
22. If the debt ratio (r) increases while all other parameter values remain constant, AER will [Decrease? Increase? Remain constant?
