Modern Artifacts can produce keepsakes that will be sold for $100 each. Nondepre

Question

Modern Artifacts can produce keepsakes that will be sold for $100 each. Nondepreciation fixed costs are $1,800 per year and variable costs are $45 per unit. a. If the project requires an initial investment of $2,000 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? a-1. Accounting break-even levels of sales _____units a-2. 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 35%? b-1. Accounting break-even levels of sales _____units b-2. NPV break-even levels of sales _____units

Explanation / Answer

Contribution margin per unit = Selling price per unit - Variable cost per unit = $ 100 - $ 45 = $ 55

Contribution margin ratio = $ 55 / $ 100 = 55%

Fixed expenses = Nondepreciation fixed cost + Annual depreciation expense = $ 1,800 + $ 400 = $ 2,200

Accounting break-even level of sales = Fixed cost / Contribution margin per unit = $ 2,200 / $ 55 = 40 units

or $ 2,200 / 55% = $ 4,000

NPV breakeven is the sales level at which NPV is 0.

NPV = Present value of cash inflows - Initial investment

Let the NPV break-even level sales be Q

Present value of cash inflows at discount rate of 12% = (55Q - 1,800) x 3.605 = 198.275 Q - 6,489

Break-even NPV = 198.275 Q - 6,489 - 2,000 = 0 or Q = 42.81 units

NPV break-even dollar sales = $ 4,281

If tax rate is 35%, Present value of after-tax cash inflows = (( 55Q- 2,200) x 0.65 + 400 ) x 3.605 =( 35.75Q - 1,430+ 400) x 3.605 = (35.75 Q - 1,030) x 3.605 = 128.87875Q - 3,713.15

Break-even NPV = 128.87875Q - 3,713.15 - 2,000 =0

or Q = 44.33 units or $ 4,433

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.