Question
Sync Diamonds makes synthetic diamonds by treating carbon in a very technologically advanced and secret process. Each diamond can sell for R100. The material cost
Sync Diamonds makes synthetic diamonds by treating carbon in a very technologically advanced and secret process. Each diamond can sell for R100. The material cost for a diamond is R40. The fixed costs incurred each year for factory upkeep and administrative expenses are R200 000. The machinery costs R1 million and it is depreciated straight-line over 10 years to a salvage value of zero. i) What is the accounting break-even level of sales in terms of the number of diamonds sold? [4 Marks] ii) What is the NPV break-even level of sales assuming a tax rate of 35%, a 10-year project life, and a discount rate of 12%? [6 Marks] iii) Would the accounting break-even point in the first year of operation increase or decrease if the machinery were depreciated over a five-year period? Motivate your answer. [2 Marks] iv) Would the NPV break-even point increase or decrease if the machinery were depreciated over a five-year period? Motivate your answer. [2 Marks]
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