Thompson & Son have been busy analyzing a new product. They have determined that an operating cash flow of $16,700 will result in a zero net present value, which is a company requirement for project acceptance. The fixed costs are $12,378 and the contribution margin is $6.20. The company feels that they can realistically capture 10 percent of the 50,000 unit market for this product. Should the company develop the new product? Why or why not?
A) Yes; because 5,000 units of sales exceeds the quantity required for a zero net present value.
B) Yes; because the cash break-even point is less than 5,000 units.
C) No; because the firm cannot generate sufficient sales to obtain at least a zero net present value.
D) No; because the project has an expected internal rate of return of negative 100 percent.
E) No; because the project will not pay back on a discounted basis.

Question

Quizplus · Accepted Answer

The company can capture 5,000 units (10% of 50,000). The contribution margin per unit is $6.20, so 5,000 units would generate $31,000 in contribution margin. After covering fixed costs of $12,378, the operating cash flow would be $18,622, which exceeds the required $16,700 for a zero NPV.

Thompson & Son Have Been Busy Analyzing a New Product