Question

Daily Enterprises is purchasing a $6,000,000 machine. The machine will be depreciated using straight-line depreciation over its 6-year life and will have no salvage value. The only costs are fixed costs of $2,000,000 per year. What is the net present value break-even level of sales revenue if the tax rate is 40 percent and the discount rate is 10 percent?

Answer 1

Given :

Purchase Cost ie.Initial Investment = $6,000,000

Depreciation Method : Straight Line Method

Life of the machine : 6 years

Fixed costs= $2,000,000 per year

Variable Costs =$0

Tax Rate = 40%

Discount Rate ie.i=10%

Net Present Value(NPV) =( Cash Flow/ (1+i)t  ) - Initial Investment

NPV = ( (2,000,000/(1+.1))6 ) -$6,000,000

NPV = $5,958,111.75

Break -even level of sales revenue= Fixed Cost /(Sales-Variable Costs)

Break -even level of sales revenue= $12000000/ (6000000-0)

Break -even level of sales revenue=$12000000/ ($6000000-0)

Break -even level of sales revenue=$2,000,000

Contribution Margin = Sales-Variable Costs= $6,000,000 - $0 = $6,000,000

Pre-tax Profit = Contribution Margin - Fixed Costs = $6,000,000 - $2,000,000 =$4,000,000

After-tax Profit = Pre-tax Profit - (Pre-tax Profit * Tax Rate)

After-tax Profit = $4,000,000 - ($4,000,000 * 40%)

After-tax Profit = $4,000,000 - ($1,600,000)

After-tax Profit (Revenues) =. $2,400,000