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

To determine the level of sales at which the firm should abandon the project, calculate the present value of cash flows for two years and compare it to the abandonment value. The firm should abandon if the present value of cash flows from continuing is less than the abandonment value.

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