Break-even calculations are most often concerned with the effect of a shortfall in sales, but they could

Question:

Break-even calculations are most often concerned with the effect of a shortfall in sales, but they could equally well focus on any other component of cash flow. Dog Days is considering a proposal to produce and market a caviar-flavored dog food. It will involve an initial investment of $90,000 that can be depreciated for tax straight-line over 10 years. In each of years 1-10, the project is forecast to produce sales of $100,000, and to incur variable costs of 50% of sales and fixed costs of $30,000. The corporate tax rate is 30%, and the cost of capital is 10%.

a. Calculate the NPV and accounting break-even levels of fixed costs.

b. Suppose that you are worried that the corporate tax rate will be increased immediately after you commit to the project. Calculate the break-even rate of tax.

c. How would a rise in the tax rate affect the accounting break-even point?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Principles of Corporate Finance

ISBN: 978-1259144387

12th edition

Authors: Richard Brealey, Stewart Myers, Franklin Allen

Question Posted: