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79. Your firm is considering a project with a five-year life and an initial cost of $120,000. The discount rate for the project is 12%. The firm expects to sell 2,100 units a year. The cash flow per unit is $20. The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $50,000. You are interested in knowing how the project will perform if the sales forecasts for years four and five of the project are revised such that there is a 50% chance that the sales will be either 1,400 or 2,500 units a year. What is the net present value of this project given your sales forecasts? A. $23,617B. $23,719C. $25,002D. $26,877E.$28,746Level to abandon = At 1,400 units you will abandon the project and receive $50,000.At 2,500 you will continue the project and the NPV will be: Difficulty level: ChallengeTopic: OPTION TO ABANDONType: PROBLEMS7-62
Chapter 07 - Risk Analysis, Real Options, and Capital Budgeting80. Margerit is reviewing a project with projected sales of 1,500 units a year, a cash flow of $40 a unit and a three-year project life. The initial cost of the project is $95,000. The relevant discount rate is 15%. Margerit has the option to abandon the project after one year at which time she feels she could sell the project for $60,000. At what level of sales should she be willing to abandon the project? Difficulty level: ChallengeTopic: OPTION TO ABANDONType: PROBLEMS81. A project has a contribution margin of $5, projected fixed costs of $10,000, a projected variable cost per unit of $12, and a projected present value break-even point of 6,000 units. What is the operating cash flow at this level of output? Operating cash flow at the financial break-even point = (6,000 ×$5) - $10,000 = $20,000Difficulty level: MediumTopic: PRESENT VALUE BREAK-EVENType: PROBLEMS7-63
Chapter 07 - Risk Analysis, Real Options, and Capital Budgeting82. Quirk and Company has been busy analyzing a new product. It has determined that an operating cash flow of $18,500 will result in a zero net present value, which is a company requirement for project acceptance. The fixed costs are $14,000 and the contribution margin is $8.00. The company feels that it can realistically capture 10% of the 40,000 unit market for this product. Should the company develop the new product? Why or why not? Financial break-even point = ($14,000 + $18,500) ÷$8.00 = 4,062.50; The product should not be accepted because the expected level of sales is less than the financial break-even point.