If the project requires an inital investment of $3000 and is expected to last fo
ID: 2699547 • Letter: I
Question
If the project requires an inital investment of $3000 and is expected to last for 5 years and the firm pays no taxes. The initial investemnt will be deprecited stratightline over 5 years to a final value of zero and the discount rate is 10%. What are the accounting and NPV break-even levels of sales?
Accounting break--even levels of sales 90 units
NPV break-even levels of sales 100 units
What will be the accounting and NPV break-even of sales. If the firm's tax rate is 35%
Accounting break-even levels of sales _____units
NPV breakeven _____units
sale = 80x
FC = 1200
VC =60
Depreciation = 3000/5 = 600
for break even
profit = 0 = 80x-1200-60x-600
x = 1800/20 = 90 unit
now, cashflow each year = 20x-1200
NPV = 0 = -3000 +(20x-1200)*(PVIFA(10,5)
3000= (20x-1200)*(3.79)
3000/3.79)+(1200) = 20x
x = 1991.55/20 = 99.55 = 100
Explanation / Answer
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 firms tax rate is 35% . Depreciation expense = $3,000/5 = $600 per year Investment Sales Var. Costs Fixed Costs Depreciation Pretax Profit Taxes (0%) Net Profit Net Cash Flow Year 0 $3,000 -$3,000 Year 1 5 $80N $60N $1,000 $600 $20N $1,600 $20N $1,600 $20N $1,600 $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 = Fixed costs including depreciation $1,000 + $600 = = $6,400 per year ============================================================================================================================ Additional profit each from additional dollar of sales 0.25 This sales level corresponds to a production level of: $6,400/$80 per unit = 80 units