Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondeprec
ID: 2798486 • Letter: M
Question
Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondepreciation fixed costs are $2,300 per year and variable costs are $42 per unit.
If the project requires an initial investment of $6,000 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 10%. What are the accounting and NPV break-even levels of sales? (Do not round intermediate calculations. Round your answers to the nearest whole number.)
What will be the accounting and NPV break-even levels of sales, if the firm's tax rate is 40%? (Do not round intermediate calculations. Round your answers to the nearest whole number.)
Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondepreciation fixed costs are $2,300 per year and variable costs are $42 per unit.
If the project requires an initial investment of $6,000 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 10%. 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 unitsWhat will be the accounting and NPV break-even levels of sales, if the firm's tax rate is 40%? (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 unitsExplanation / Answer
a) .Depreciation = $6000/5year = $1200 per year
Accounting breakeven point= (Fixed cost + depreciation)/ Contribution per unit
= $2300+$1200/($70-$42)
=$ 3500/$28 = 125 units
NPV breakeven level of sales is where PV of cash outflows= PV of cash inflows
i.e. $ 6000 = PV{($28*sale units)-$ 2300}(10%,5 year)
PVAF (10%, 5) = 3.791 as per PVAF table.
6000= (28*sale units - 2300)*3.791
Sale units = 138.67 units
NPV breakeven level of sales = 138.67 or say 139 units
b ) Accounting and NPV break-even levels of sales, if the firm's tax rate is 40%
No tax implication of tax on accounting breakeven level of sales it will be same as above i.e. 125 units
NPV breakeven
Cash inflows when tax is there= [(1 T ) * (revenue cash expenses)] + ( T * depreciation)
=(1-0.4)*(28*Q - 2300) + (0.4*1500)
=16.8Q-780
: Let Q be the sale units.
At NPV breakeven, PV Cash outflow= PV Cash inflow
6000= PV(16.8Q-780)(10%,5)
PVAF(10%,5)= 3.791 from the PVAF table
6000= (16.8Q-780)*3.791
Q= 140.63
NPV breakeven units = 140.63 or say 141 units.
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