Exercise #6

Exercise #6 - Finance 351: Financial Management Instructor:...

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1 Finance 351: Financial Management Instructor: Shuming Liu In-Class Exercise 6 Chapter 10 Question 15 Modern Artifacts can produce keepsakes that will be sold for $80 each. Nondepreciation fixed costs are $1,000 per year and variable costs are $60 per unit. a. If the project requires an initial investment of $3,000 and is expected to last for 5 years and the firm pays no taxes, what are the accounting and NPV breakeven levels of sales? The initial investment will be depreciated straight-line over 5 years to a final value of zero, and the discount rate is 10% b. How do your answers change if the firm’s tax rate is 35% Answer: a. Depreciation expense = $3,000/5 = $600 per year Year 0 Year 1 – 5 Investment $3,000 Sales $80N Var. Costs $60N Fixed Costs $1,000 Depreciation $600 Pretax Profit $20N – $1,600 Taxes (0%) $20N – $1,600 Net Profit $20N – $1,600 Net Cash Flow -$3,000 $20N – $1,600 + $600 (1) Accounting Break-even level of sales: Method 1: Variable cost = 75% of sales revenue
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This note was uploaded on 11/18/2011 for the course FIN 351 taught by Professor Li during the Fall '09 term at S.F. State.

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Exercise #6 - Finance 351: Financial Management Instructor:...

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