Question

A project cost $1 initial million investment and would depreciate straight line to 0 in 10 years. Besides depreciation, the variable cost is 60% of sales and fixed cost is $100,000 per year. Assume the income tax of 21%. Which BE in accounting is 500,000.

If the discount rate is 8%, what is the NPV break even of sales?

Answer 1

Depreciation = project cost / 10 years = 1,000,000 / 10 = $ 100,000 per year

Paeticilara	amount
Break even sales	500,000
Less- variable cost @60% of sales	300,000
Less - fixed cost	100,000
Less- depreciation	100,000
Profit before tax	0
Less - tax	0
Profit after tax	0
Add- depreciation	100,000
Fred Cash flows after tax	100,000

NPV = Present value of cash infliws - initial investment

NPV = $ 100,000 * PVAF ( 8% ,10years)-1,000,000

NPV = $ 100,000 * 6.71008141 - 1,000,000

NPV at break even point = $ - 328,991.859