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Unformatted text preview: Solutions to Chapter 9 Project Analysis 9. a.Each dollar of sales generates $0.60 of pretax profit. Depreciation expense is $100,000 per year and fixed costs are $200,000. Therefore: Accounting breakeven revenue = ($200,000 + $100,000)/0.60 = $500,000 The firm must sell 5,000 diamonds annually. b. Let Q = the number of diamonds sold Cash flow equals = [(1 0.35) (Revenue expenses)] + (0.35 depreciation) = [0.65 (100Q 40Q 200,000) + (0.35 100,000) = 39Q 95,000 12%, 10Year Annuity factor = 65022 . 5 (1.12) 0.12 1 0.12 1 10 =  Therefore, for NPV to equal zero: (39Q 95,000) 5.65022 = $1,000,000 Q = 6,974 diamonds per year 10. a.The accounting breakeven point would increase because the depreciation charge will be higher, thereby reducing net profit. b. The economic breakeven point would decrease because the present value of the depreciation tax shield will be higher when all depreciation charges can be taken in the first five years. 11. The accounting breakeven point would be unaffected since taxes paid are zero when pretax profit is zero, regardless of the tax rate. The economic breakeven point would increase since the aftertax cash flow corresponding to any level of sales falls when the tax rate increases. 12. Cash flow = Net income + depreciation If depreciation is positive, then cash flow will be positive even when net income = 0. Therefore the level of sales necessary for cash flow breakeven is less than the level of sales necessary for zeroprofit breakeven....
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 Winter '07
 Tennyson
 Depreciation, Revenue, Corporate Finance, Sales

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