Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondeprec
ID: 2628835 • Letter: M
Question
Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondepreciation fixed costs are $2,300 per year and variable costs are $42 per unit.
a.
If the project requires an initial investment of $6,000 and is expected to last for 5 years and the firm pays no taxes. The initial investment will be depreciated straight-line over 5 years to a final value of zero, and the discount rate is 10%. What are the accounting and NPV break-even levels of sales? (Do not round intermediate calculations. Round your answers to the nearest whole number.)
Accounting break-even levels of sales
units
NPV break-even levels of sales
units
b.
What will be the accounting and NPV break-even levels of sales, if the firm's tax rate is 40%? (Do not round intermediate calculations. Round your answers to the nearest whole number.)
Accounting break-even levels of sales
units
NPV break-even levels of sales
units
Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondepreciation fixed costs are $2,300 per year and variable costs are $42 per unit.
a.
If the project requires an initial investment of $6,000 and is expected to last for 5 years and the firm pays no taxes. The initial investment will be depreciated straight-line over 5 years to a final value of zero, and the discount rate is 10%. What are the accounting and NPV break-even levels of sales? (Do not round intermediate calculations. Round your answers to the nearest whole number.)
Accounting break-even levels of sales
units
NPV break-even levels of sales
units
b.
What will be the accounting and NPV break-even levels of sales, if the firm's tax rate is 40%? (Do not round intermediate calculations. Round your answers to the nearest whole number.)
Accounting break-even levels of sales
units
NPV break-even levels of sales
units
Explanation / Answer
Checking an annuity table the factor for 5 years at 10% is 3.79079
So the project must generate 6,000/3.79079= 1,583 in cash yearly to break even.
Without taxes we have x(70-42) - 2300= 1583
Solving for x we get 139 (rounded) as the break even level.
With taxes we have (x(70-42) -2300)*(1-.40)) +1200*.40 (depreciation tax shield)= 1583
Solving for x we get a breakeven of 205 units (rounded).
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