Your ﬁrm is considering a project with a four-year life and an initial cost of $87,000.The discount rate for the project is 15 percent. The ﬁrm expects to sell 1,800 units a year. The cash ﬂow per unit is $19.
The ﬁrm will have the option to abandon this project after two years at which time they expect they
Could sell the project for $40,000. At what level of sales should the ﬁrm be willing to abandon this
Project?
A) 1,107 units
B) 1,295 units
C) 1,361 units
D) 1,540 units
E) 1,565 units

Question

Quizplus · Accepted Answer

The firm should calculate the present value of cash flows for two years and compare it with the abandonment value. If the present value of cash flows from continuing the project is less than $40,000, the firm should abandon the project. At 1,295 units, the present value of cash flows equals the abandonment value.

Your ﬁRm Is Considering a Project with a Four-Year Life