Question

Modern Artifacts can produce keepsakes that will be sold for $70 each. Nondepreciation fixed costs are $2,300 per year and variable costs are $42 per unit.

a.

If the project requires an initial investment of $6,000 and is expected to last for 5 years and the firm pays no taxes. The initial investment will be depreciated straight-line 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? (Do not round intermediate calculations. Round your answers to the nearest whole number.)

Accounting break-even levels of sales	units
NPV break-even levels of sales	units

b.	What will be the accounting and NPV break-even levels of sales, if the firm's tax rate is 40%? (Do not round intermediate calculations. Round your answers to the nearest whole number.)

Accounting break-even levels of sales	units
NPV break-even levels of sales	units

Answer 1

a
Accounting break-even levels of sales	125 Units
NPV break-even levels of sales	1339 Units

b
Accounting break-even levels of sales	125 Units
NPV break-even levels of sales	141 Units

a) Depreciation = $6000/5year = $1200 per year

Accounting break-even point= (Fixed cost + depreciation)/ Contribution per unit

= $2300+$1200/($70-$42)

=$ 3500/$28 = 125 units

NPV break-even level of sales is where PV of cash outflows= PV of cash inflows

i.e. $ 6000 = PV{($28*sale units)-$ 2300}_{(10%,5 year)}

PVAF _{(10%, 5)} = 3.791 as per PVAF table.

6000= (28*sale units - 2300)*3.791

Sale units = 138.67 units

NPV break-even level of sales = 138.67 or say 139 units

b ) Accounting and NPV break-even levels of sales, if the firm's tax rate is 40%

No tax implication of tax on accounting breakeven level of sales it will be same as above i.e. 125 units

NPV breakeven

Cash inflows when tax is there= [(1 − T ) * (revenue − cash expenses)] + ( T * depreciation)

=(1-0.4)*(28*Q - 2300) + (0.4*1500)

=16.8Q-780

: Let Q be the sale units.

At NPV breakeven, PV Cash outflow= PV Cash inflow

6000= PV(16.8Q-780)_(10%,5)

PVAF_(10%,5)= 3.791 from the PVAF table

6000= (16.8Q-780)*3.791

Q= 140.63

NPV breakeven units = 140.63 or say 141 units.