Problem: Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for $100. The materials cost for a standard diamond is $30. The fixed costs incurred each year for factory upkeep and administrative expenses are $200,000. The machinery costs $1 million and is depreciated straightline over 10 years to a salvage value of zero.
Q1. What is the accounting break-even level of sales in terms of number of diamonds sold?
Q2. What is the NPV break-even level of sales assuming a tax rate of 35 percent, a 10-year project life, and a discount rate of 12 percent?