Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond
ID: 2714939 • Letter: D
Question
Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $100. The materials cost for a standard diamond is $50. The fixed costs incurred each year for factory upkeep and administrative expenses are $213,000. The machinery costs $2.4 million and is depreciated straight-line over 10 years to a salvage value of zero.
What is the accounting break-even level of sales in terms of number of diamonds sold?
What is the NPV break-even level of sales assuming a tax rate of 40%, a 10-year project life, and a discount rate of 14%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)
Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $100. The materials cost for a standard diamond is $50. The fixed costs incurred each year for factory upkeep and administrative expenses are $213,000. The machinery costs $2.4 million and is depreciated straight-line over 10 years to a salvage value of zero.
Explanation / Answer
Annual depreciation = (cost of asset – salvage value)/ life
=(2,400,000 -0)/ 10
= 240,000
Accounting breakeven point = (Fixed cost + depreciation)/(SP-VC)
=(213,000 +240,000)/(100-50)
=9060
Depreciation tax shield = annual depreciation x tax rate
= 240,000 x 40%
= 96,000
Sales revenue (9060 x100)
906000
variable cost (9060 x50)
-453000
Fixed cost
-213000
EBIT
240000
Tax
-96000
Net income
144000
Depreciation tax shield
96000
Annual cash flow
240000
NPV = annual cash flow x PVIFA (10, 14%) -Initial Investment
= 240000 x5.2161 – 2,400,000
= -1,148,136
Sales revenue (9060 x100)
906000
variable cost (9060 x50)
-453000
Fixed cost
-213000
EBIT
240000
Tax
-96000
Net income
144000
Depreciation tax shield
96000
Annual cash flow
240000
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