please show work for number 9 a. Using a aight-line depreciation schedule with m

Question

please show work for number 9

a. Using a aight-line depreciation schedule with mn salvage value al the end of a 6 year life, what are the cash flows of the projeet each year? (The old equipment is fully depreciated) what would-be if using the 5-Year MACRS schedule? Tr286 text) c. your 9. SA Precious Stones fabericates artificial eserside and sells them for $100 a stone t costs 540 so make them. The fixed cost each year to run the factory is 5200,000. straight- line over 10 years with zero salvage value. What is the accounting break-even? what is the NPV break-nen gyen a 35% corporane tax rate and with an opportunity cost orcapital at 12%? 10. Use the following information to solve for both the average variance and standard deviation of returns for the market Returns 1999 2000 27.52 12.9

Explanation / Answer

ACCOUNTING BREAK EVEN = THESE ARE THE LEVEL OF SALES AT WHICH THERE IS NO PROFIT OR LOSS

Accounting break even = Fixed cost + Depreciaiton / Sales - Variable cost

                                      = 200,000 + 100,000/ 100 - 40

                                     = 300,000/60

                                    = 5,000 units or

                                    = $500,000 ( 5,000 x 100)

2. NPV break even occurs when NPV = 0

   Let the price per unit be p and the quantity sold is q and variable cost per unit is v

   then NPV = Annuity Factor (0.65 x (qp - qv-FC) + (0.35 x Depreciaiton)

   5.650 (0.65q (p-v - FC ) + (0.35 x 100,000) - 1,000,000

   1,000,000/5.650 - 0.35 x 100,000 = 0.655q(p-v) - 0.65 x 200,000

   141,991.15= 0.65q (100-40)-130,000

    141,991.15+130000 = 0.65q70; q = 271,991.15/0.65 x 60 = 271991.15/39 = 6,974 units

At the break even point:

Revenues = q.p = 6974 units x 100 = $697,400

Variable cost = q.v = 6974 x 40 = $278,960

Fixed cost = $200,000

Total cost = 278,960 + 200,000 = 478,960

Depreciaiton = 100,000 per year

Tax rate = 0.35

Cash flow = (1-tax rate) x (Revenues - total expenses) + Tax rate x Depreciaiton

0.65 (697400 - 478,960) + 0,35 x 100,000

141,986 + 35,000 = 176,986

Present value of cash flow = cash flow x Annuity factor = 176,986 x 5.650 = 999,971

NPV = Pv of cash flow - initial investment = 999,971 - 1,000,000 = $29 approximately NPV =0. Hence, NPV breaken even occur at the sales of $697,400

     

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