Question

Western Industrial Products is considering a project with a five-year life and an initial cost of $140,000. The discount rate for the project is 11 percent. The firm expects to sell 2,100 units a year. The cash flow per unit is $25. The firm will have the option to abandon this project at the end of year three (after year three's sales) at which time the project's assets could be sold for an estimated $65,000. The firm should abandon the project at the end of year three if the expected level of annual sales, starting with year 4, falls to _____ units or less. Ignore taxes.

1,518 units 1,050 units 700 units 3,203 units 158 units

Answer 1

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00:43 C w A ENG 15 23-05-2020 20 Х CU1307 . CS CT CU CV CW CX CY CZ DA DB THE COMPANY SHOULD ABANDON THE PROJECT IF THE PV OF REVISED CASHFLOWS FOR YEAR 4 AND 5 IS LESS THAN THE PROJECT'S AFTER TAX SALVAGE VALUE SO WE HAVE TO CALCULATE PV OF ALL CFAT WHICH SHOULD BE EQUAL TO AFTER TAX SALVAGE VALUE AFTER TAX SALVAGE VALUE = CFAT X PVIFA @11%, 2 YEARS 65000 = CFAT X 1.7125233 CFAT = 65000 / 1.7125233 = 37955.69 ANSWER LEVEL OF EXPECTED SALES = 1518 (37955.69/25] NOTE : PVIFA @11%, 2 YEARS = 1.7125233 1291 1292 1293 1294 1295 1296 1297 1298 1299 1300 1301 1302 1303 1304 1305 1306 1307 1308 1309 1310 1311 1312 1313 1314 STOCK DIV NAV HEDGE FUND MF EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB PS ROPI APV ROSS price quote LEV ... +