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AsafinancialanalystbasedintheUnitedStates,youhavejustcomputedboththeaccountingandNPVbreak-evensaleslevelsforaprojectunderconsideration.Youhaveusedastraightlinedepreciationoverasix-yearperiod.YourmanagerwantsyoutoredothecomputationusingtheModifiedAcceleratedCashRecoverySystemorMACRS.Undertherules,theapplicabledepreciationratesoveryears1to6willbe20,32,19.20,11.52,11.52and5.76.MACRSeffectivelyallowsafirmtousehigherdepreciationratesintheearlyyears. Instruction: A:Qualitativelyspeaking(nocalculationneeded!),howwillaswitchtoMACRSaffecttheaccountingbreak-evenlevelofsalesinthefirstyearsoftheproject? B:Qualitativelyspeaking(nocalculationneeded!),whatwillhappentotheNPVbreak-evenlevelofsales? C:WilltheswitchtoMACRSmaketheprojectmoreorlessattractive?Explain.

  • AsafinancialanalystbasedintheUnitedStates,youhavejustcomputedboththeaccountingandNPVbreak-evensaleslevelsforaprojectunderconsideration.Youhaveusedastraightlinedepreciationoverasix-yearperiod.YourmanagerwantsyoutoredothecomputationusingtheModifiedAcceleratedCashRecoverySystemorMACRS.Undertherules,theapplicabledepreciationratesoveryears1to6willbe20,32,19.20,11.52,11.52and5.76.MACRSeffectivelyallowsafirmtousehigherdepreciationratesintheearlyyears.
  • Instruction:
    • A:Qualitativelyspeaking(nocalculationneeded!),howwillaswitchtoMACRSaffecttheaccountingbreak-evenlevelofsalesinthefirstyearsoftheproject?
    • B:Qualitativelyspeaking(nocalculationneeded!),whatwillhappentotheNPVbreak-evenlevelofsales?
    • C:WilltheswitchtoMACRSmaketheprojectmoreorlessattractive?Explain.

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