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

Answer: Accounting break even :

Sales price * no of units = fixed cost + variable cost * no of units

lets say no of units is x

60*x = 2200 + 30* x

x = 2200/30 = 73.67 approx 74 units to get break even

NPV break even level of sales will be calculted as

first we will have to calculate the net cash flow and find out where NPV is getting to 0

Lets take no of units sold ( break even sales) as x

but this NPV should be 0 at break even NPV sales = (150x - 11000)*3.4331 -4000 = 0

150x -11000 = 4000/3.4331

150x -11000 = 1165.12

150x = 1165.12 +11000

x = 81.1 or approx 82 units

Answer B : if tax rate becomes 30% then accounting break even wont gave any difference it would be same 74 units as it is the point where profit is 0 . so not point of tax effect

for NPV break even tax rate will effect the output

Solving this to get the value of x

put this equal to 0 to get NPV break even sales

0.7*(30x-3000) +800 = 4000/(3.4331*5)

0.7*(30x-3000) +800= 233.0255

0.7(30x-3000) = 233.0255-800

30x-3000 = -566.97/0.7

x = 73.001 or approx 73 units

0 1 2 3 4 5 Intial investment 4000 revenue 60x 60x 60x 60x 60x Variable cost 30x 30x 30x 30x 30x Fixed cost 2200 2200 2200 2200 2200 Depreciation 800 800 800 800 800 net cash flow 9 30x-3000 30x-3000 30x-3000 30x-3000 30x-3000 tax 0 0 0 0 0 0 Add back depreciation( here in 1st case no tax) -4000 30x -2200 30x -2200 30x -2200 30x -2200 30x -2200 annuity factor for 5 year at 14% 3.4331 NPV (5*(30x -2200)* 3.4331-4000 )

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