Modern Artifacts can produce keepsakes that will be sold for $60 each. Nondeprec

Question

Modern Artifacts can produce keepsakes that will be sold for $60 each. Nondepreciation fixed costs are $2,200 per year and variable costs are $30 per unit. a. 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 14%. 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 30%? (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

Accounting break-even point = (Fixed Cost + Depreciation) / (Price - VC)

here, Depreciation = Investment / No. of years = 4,000 / 5 = 800

=> Accounting break-even point = (2200 + 800) / (60 - 30) = 100 units

NPV Break-even level is the level of sales at which NPV is zero. We get at unit sales of 109 units, NPV = 0

0 1 2 3 4 5 Investment -4,000 Sales 6562.2 6562.2 6562.2 6562.2 6562.2 VC -3281.1 -3281.1 -3281.1 -3281.1 -3281.1 FC -2200 -2200 -2200 -2200 -2200 Depreciation -800 -800 -800 -800 -800 EBT 281.1 281.1 281.1 281.1 281.1 Tax (30%) -84.33 -84.33 -84.33 -84.33 -84.33 Net Income 365.43 365.43 365.43 365.43 365.43 Cash Flows -4,000 1165.43 1165.43 1165.43 1165.43 1165.43 NPV $1.02

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