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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 Therefore, additional profit per \$1 of additional sales = \$0.25 Accounting Break-even level of sales = year

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

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