Hammer Company Proposes to Invest $6 Million in a New

Multiple Choice

Hammer Company proposes to invest $6 million in a new type of hammer-making equipment.The fixed costs are $1.0 million per year.The equipment will last for five years.The manufacturing cost per hammer is $1 and each hammer sells for $6.The cost of capital is 20%.Calculate the break-even sales volume per year.(Ignore taxes.Round to the nearest 1,000.)

A) 500,000 units
B) 550,000 units
C) 600,000 units
D) 650,000 unitsFirst,find the annual cash flow that justifies a $6 million investment using the equivalent annual cost (EAC) method.The 5-year annuity factor @ 20% equals 2.9906.EAC = 6/2.9906 = 2 million.The equipment must net this amount of cash flow each year.Given $1.0M of annual fixed costs,let X = the annual sales rate:X (6 - 1) - 1,000,000 = 2,000,000;