Depreciation and Sales Breakeven-The Ariat Corporation is considering purchasing a new tanning machine for the manufacturing of its Roper Boots.

  1. The Ariat Corporation is considering purchasing a new tanning machine for the manufacturing of its Roper Boots. The price is $10,000. The old one can be sold with no salvage value for $3,000. The new one would last for 5 years and save approximately $2,000 per year. If the discount rate is 12% and the company’s tax rate is 35%, what would the impact be using straight-line 5 year depreciation schedule versus using a 5 year MACRS schedule? Which would you use and why?

 

  1. SA Precious Stones fabricates artificial emeralds and sells them for $110 a stone.

It costs $55 to make them. The fixed cost each year to run the factory is

$200,000.

The machinery to make these emeralds costs $1 million and is depreciated

straight-line over 10 years with zero salvage value. What is the accounting

break-even?

What is the NPV break-even given a 35% corporate tax rate and with an

opportunity cost of capital at 6%?

 

Accounting Breakeven: _______________

NPV Breakeven:            _______________