Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondeprec

Question

Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondepreciation fixed costs are $2,700 per year and variable costs are $42 per unit.

If the project requires an initial investment of $4,000 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 12%. What are the accounting and NPV break-even levels of sales? (Do not round intermediate calculations. Round your answers to the nearest whole number.)

What will be the accounting and NPV break-even levels of sales, if the firm's tax rate is 35%? (Do not round intermediate calculations. Round your answers to the nearest whole number.)

Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondepreciation fixed costs are $2,700 per year and variable costs are $42 per unit.

Explanation / Answer

a) Initial Investment is $ 4000

This depriciates over a period of 5 years.

We can take it as fixed cost of $ 800 per year.

Total Fixed Cost (TFC) = $800 + $2700 = $ 3500

TFC + TVC = n*SP

TFC + n*VC = n*SP

n = TFC/(SP - VC)

SP is selling price.

TVC is Total Variable Cost

n = 3500/(70 - 42) =125 units.

NPV = Amount/(1 + R)^t

R is Discount Rate

t is the period.

For t = 0 , n = 3500/28 = 125

For t = 1 , n = 3500/(1.12)/28 = 112

For t = 2 , n = 100

For t = 3 , n = 89

b)TFC + TVC + 0.35 n SP = n*SP

n = 3500/0.65/28 = 192 units

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