Problem 10 (3) Break-Even (LO2)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 $40. The fixed
costs incurred each year for factory upkeep and administrative
expenses are $203,000. The machinery costs $1.4 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?
Break-even sales
b.What is the NPV break-even level of sales assuming a tax rate
of 35%, a 10-year project life, and a discount rate of 14%?(Do not
round intermediate calculations. Round your answer to the nearest
whole number.)
Break-even sales
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Problem 10-(4)NPV Break-Even (LO2)Modern Artifacts can produce
keepsakes that will be sold for $50 each. Nondepreciation fixed
costs are $2,900 per year and variable costs are $30 per unit.
a.If the project requires an initial investment of $3,000 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 14%. 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 salesunits
NPV break-even levels of salesunits
b.What will be theaccounting 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 salesunits
NPV break-even levels of salesunits
roblem 10-(5)Project Options (LO4)A silver mine can yield 12,000
ounces of silver at a variable cost of $30 per ounce. The fixed
costs of operating the mine are $54,000 per year. In half the
years, silver can be sold for $46 per ounce; in the other years,
silver can be sold for only $23 per ounce. Ignore taxes.
a.What is the average cash flow you will receive from the mine
if it is always kept in operation and the silver always is sold in
the year it is mined?
Average cash flow$
b.Now suppose you can shut down the mine in years of low silver
prices. Calculate the average cash flow from the mine.
Average cash flow$
Problem 10-(6) Scenario Analysis (LO2)The most likely outcomes
for a particular project are estimated as follows:
Unit price:$60
Variable cost:$40
Fixed cost:$390,000
Expected sales:$38,000units per year
However, you recognize that some of these estimates are subject
to error. Suppose that each variable may turn out to be either 10%
higher or 10% lower than the initial estimate. The project will
last for 10 years and requires an initial investment of $1.8
million, which will be depreciated straight-line over the project
life to a final value of zero. The firms tax rate is 40% and the
required rate of return is 10%.
a.What is project NPV in the best-case scenario, that is,
assuming all variables take on the best possible value?(Negative
amount should be indicated by a minus sign. Enter your answer in
dollars not in millions. Do not round intermediate calculations.
Round your answer to the nearest dollar amount.)
NPV$
b.What is project NPV inthe worst-case scenario?(Negative amount
should be indicated by a minus sign. Enter your answer in dollars
not in millions. Do not round intermediate calculations. Round your
answer to the nearest dollar amount.)
NPV$
