chap009solutions - Solutions to Chapter 9 Project Analysis...

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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.
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