Question

Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $140. The materials cost for a standard diamond is $60. The fixed costs incurred each year for factory upkeep and administrative expenses are $214,000. The machinery costs $2.1 million and is depreciated straight-line over 10 years to a salvage value of zero.

a. What is the accounting break-even level of sales in terms of number of diamonds sold? (Do not round intermediate calculations.)

b. What is the NPV break-even level of diamonds sold per year assuming a tax rate of 21%, a 10-year project life, and a discount rate of 12%? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

Answer 1

1.
=(214000+2.1/10*10^6)/(140-60)=5300

2.
=((2.1*10^6*12%/(1-1/1.12^10)-2.1/10*10^6)/(1-21%)+214000+2.1/10*10^6)/(140-60)=7858.01811290621