Solve the problems in excel and demonstrate formulas to explain results.
1.Modern Artifacts can produce keepsakes that will be sold for $80 each. Non depreciation fixedcosts are$1,000 per year and variable costs are $60 per unit.(LO2). The initial investment of $3,000 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 pay no taxes?
b.what is the NPV break-even level of sales if the firm pays no taxes?
c.What is the accounting break-even level of sales if the firm tax rate is 35%d.what is the NPV break-even level of sales if the firm tax rate is 35%?
2.You are evaluating a project that will require an investment of $10 million that will be depreciated over a period of 7 years. You are concerned that the corporate tax rate will increase during the life of the project.
a. will this increase the accounting break-even point?
b.will it increase the NPV break-even point?
3.if the finefodder superstore project (see problem 4) operates at accounting break-even, will net present value be positive or negative?
4. Reconsider finefodder superstore. Suppose that by investing an additional $600,000 initially in more efficient checkout equipment , Finefodder could reduce variable cost to 80% of sales.
a.using the base-case assumptions , find npv of this alternative scheme.(remember to focus on the incremental cash flows from the project)
b.At what level of sales will accounting profits be unchanged if the firm invests in the new equipment ? Assume the equipment recieves the same 12 year straight line depreciation treatment as in the original example (focus on the project incremental effects on fixed and variable costs.
c. what is npv break-even point?
5. a financial analyst has computed both accounting and NPV break-even sales levels for a project using straight line depreciation over a 6 year period . The project manager wants to know what will happen to these estimates if the firm uses MACRS depreciation instead. The capital investment will be in a 5 year recovery period class under MACRS rules. The firm is in a 35% tax bracket.
a.would the accounting break-even level of sales in the first years of the project increase or decrease?
b. would the npv break-even level of sales in the first years of the project increase or decrease?
c. if you were advising the analyst , would the answer to (a) or (b) be important to you ? Specifically , would you say that the switch to MACRS makes the project more or less attractive?
6. what is the lowest possible value for degree of operating leverage for a profitable firm? Show with a numerical example that if modern artifacts(see problem 1) has zero fixed costs , then DOL=1 and in fact sales and profits are directly proportional , so a 1%change in sales results in a 1% change in profits.