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
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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
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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
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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.)