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 $3,000 per year, and variable costs are $30 per unit. The initial investment of $3.000 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 10%. a. What is the accounting break-even level of sales if the firm pays no taxes? (Do not round Intermedlate calculations. Round your answer to the nearest whole number.) Acounting break-even kevet of nakes break-even level of sales r Intel b. What is the NPV break-even level of sales if the firm pays no taxes? (Do not round Intermedlate calculations. Round your answer to the nearest whole number.) c. what is the accounting break-even level of sales if the firm's tax rate is 30%? (Do not round Intermediate calculations. Round your answer to the nearest whole number.) d. what is the NPV break-even level of sales if the firm's tax rate is 30%? (Do not round intermediate calculations. Round your answer to the nearest whole number. NFV break-even eved f saleunt

Explanation / Answer

Accounting break-even point = (Fixed cost per year + depreciation per year)/ (Price – variable cost)

Accounting break-even = ($3,000+ $3,000/5)/ ($60 -$30)

= $3,600/ $30

= 120 units

Net present value (NPV) break-even level calculation

NPV break-even of sales is the point where number of units of Sales makes NPV equals to zero.

NPV break-even of sales = 126 units

The accounting break-even level of sales if the firm's tax rate is 30%

Accounting break-even = ($3,000+ $3,000/5)/ ($60 -$30)

= $3,600/ $30

= 120 units (Accounting break-even point is same in both cases as tax rate has no impact on it)

Net present value (NPV) break-even level calculation if the firm's tax rate is 30%

NPV break-even of sales is the point where number of units of Sales makes NPV equals to zero.

NPV break-even of sales = 129 units

Year (t) Value of Asset Depreciation (straight line)D : asset/5 Revenue per year ($60*126.38 units) Fixed cost Variable cost ($30*126.38 units) Cash Flow (CF) = ( Revenue -Fixed cost -variable cost) PV of after tax cash flow @10% = CF/ (1+10%)^t 0 $3,000 N/A -$3,000 -$3,000 1 $600.00 $7,583 $3,000 $3,791 $791 $719 2 $600.00 $7,583 $3,000 $3,791 $791 $654 3 $600.00 $7,583 $3,000 $3,791 $791 $595 4 $600.00 $7,583 $3,000 $3,791 $791 $541 5 $600.00 $7,583 $3,000 $3,791 $791 $491 NPV (sum of PVs) $0

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