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484 Corporate Finance BRILLIANT’S

Note: Contribution margin ratio = 1 – Variable margin ratio
= 1 – 66.67% or 1 – 0.6667
= 0.333
Thus, the accounting break even level of sales is ` 90,090.
Financial break even analysis:
PV (Cashflows) = Investment
PVAF [12%,10 years] × [Cashflows] = ` 20,00,000
Calculation of cashflows: Let sales at break even point be x.
Cashflows = x × Contribution ratio
Less : Fixed cost
Less : Depreciation
Less : Tax
Profit After tax
Add : Depreciation
Cashflows

10,000
Tax Rate = % 33.33%
30,000
Cashflows = [x × 0.333 – [10,000 + 20,000]] [1 – Tax rate] + 20,000
= [0.333x – 30,000] × 0.6667 + 20,000
= 0.222x – 20,000 + 20,000 = 0.222x
Financial break-even point
= PVAF [12%,10 years] × 0.222x = ` 20,00,000
= 5.650 × 0.222x = ` 20,00,000
x = ` 15,94,515
Thus, the financial break-even level of sales is ` 15,94,515. It means the company has to attain
a target sales of ` 15,94,515 for the investment to have a zero NPV.
Illustration 5.2.9

Cash Inflows (H¡$e BZâbmo) Probabilities (àmo~o{~{bQ>rO)
(`)
10,000 0.3
12,000 0.4
15,000 0.2
17,000 0.1
The above estimated cash inflows indicate that there is 30% chance that the cash inflow
would be ` 10,000; 40% chance that it may be ` 12,000 and so on. On the basis of these estimated
cash inflows, we may calculate expected value of cash flows as: