Brewster's is considering a project with a life of 5 years,an initial cost of $120,000,and a discount rate of 12 percent.The firm expects to sell 2,100 units a year at a cash flow per unit of $20.The firm will have the option to abandon this project after three years at which time it could sell the project for $50,000.At what level of sales should the firm be willing to abandon this project at the end of the third year?
A)420 units
B)1,041 units
C)1,479 units
D)1,618 units
E)2,500 units

Question

Quizplus · Accepted Answer

To determine the level of sales at which the firm should abandon the project, calculate the net present value (NPV) of continuing versus abandoning. The NPV of continuing should be compared to the $50,000 abandonment value. The breakeven point is when the NPV of continuing equals $50,000. Calculating this involves finding the sales level where the present value of future cash flows equals the abandonment value.

Brewster's Is Considering a Project with a Life of 5