chap009solutions

# chap009solutions - Solutions to Chapter 9 Project Analysis...

• Notes
• 6

This preview shows pages 1–2. Sign up to view the full content.

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 break-even 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%, 10-Year 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 break-even point would increase because the depreciation charge will be higher, thereby reducing net profit. b. The economic break-even 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 break-even point would be unaffected since taxes paid are zero when pretax profit is zero, regardless of the tax rate. The economic break-even point would increase since the after-tax 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 break-even is less than the level of sales necessary for zero-profit break-even.

This preview has intentionally blurred sections. Sign up to view the full version.

This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern