B what is the npv break even level of diamonds sold

This preview shows page 9 - 13 out of 21 pages.

b. What is the NPV break-even level of diamonds sold per year assuming a tax rate of 35%, a 10-year project life, and a discount rate of 12%? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Page 9 of 21 Assignment Print View
4/17/2016
= [$214,000 + ($2.1 million / 10)] / ($140 – 60) = 5,300 units b. For the NPV to equal zero, the present value of the operating cash flows must equal the initial investment. $2.1 million = OCF (PVIFA 12%,10 ) OCF = $371,666.74 OCF = [(Revenue – Expenses) × (1 – Tax)] + (Depreciation × Tax rate) $371,666.74 = ({[ Q × ($140 – 60)] – $214,000} × (1 – .35)) + [($2.1 million / 10) × .35] $371,666.74 = $52 Q – $139,100 + 73,500 Q = 8,409 diamonds per year Page 10 of 21 Assignment Print View 4/17/2016
You are evaluating a project that will require an investment of $15 million that will be depreciated over a period of 9 years. You are concerned that the corporate tax rate will increase during the life of the project. a. Would this increase the accounting break-even point? Page 11 of 21 Assignment Print View
b. Would it increase the NPV break-even point? n/r References Worksheet Learning Objective: 10-02 Use sensitivity, scenario, and break-even analyses to see how project profitability would be affected by an error in your forecasts. You are evaluating a project that will require an investment of $15 million that will be depreciated over a period of 9 years. You are concerned that the corporate tax rate will increase during the life of the project. a. Would this increase the accounting break-even point? No b. Would it increase the NPV break-even point? Yes a. The accounting break-even point would be unaffected since taxes paid are zero when pretax profit is zero, regardless of the tax rate. b. The NPV break-even point would increase since the after-tax cash flow corresponding to any level of sales falls when the tax rate increases. 4/17/2016
Modern Artifacts can produce keepsakes that will be sold for $50 each. Nondepreciation fixed costs are $2,500 per year, and variable costs are $30 per unit. The initial investment of $2,000 will be depreciated straight-line over its useful life of 5 years to a final value of zero, and the discount rate is 10%. a. What is the accounting break-even level of sales if the firm pays no taxes? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture