Chapter 10, Problem 10PS

Break-even analysis 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 to 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%.

1. a. Calculate the NPV and accounting break-even levels of fixed costs.
2. 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 taxes.
3. c. How would a rise in the tax rate affect the accounting break-even point?