Value-Chains makes keychains out of gold. Each keychain can be sold for $100. The materials cost is $40. The Öxed costs incurred each year for factory and administrative expenses are $200,000. The machinery costs $1 million and is depreciated straight-line over 10 years to a salvage value of zero. 1. What is the accounting break-even level of annual sales in terms of number of keychains sold? 2. 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%? 3. Elaborate on your observations and decisions.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Value-Chains makes keychains out of gold. Each keychain can be sold for $100. The materials cost is $40.
The Öxed costs incurred each year for factory and administrative expenses are $200,000. The machinery
costs $1 million and is depreciated straight-line over 10 years to a salvage value of zero.
1. What is the accounting break-even level of annual sales in terms of number of keychains sold?
2. What is the
discount rate of 12%?
3. Elaborate on your observations and decisions.
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