Question

Western Industrial Products is considering a project with a five-year life and an initial cost of $270,000. The discount rate for the project is 12 percent. The firm expects to sell 2,300 units a year. The cash flow per unit is $40. 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 $85,000. 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.

2,666 units 1,257 units 142 units 1,150 units 767 units

Answer 1

Let sales in dollars be x
Hence,
x/1.12+x/1.12^2<=85000
=>x<=85000/(1/1.12+1/1.12^2)
=>x<=50294.33962

Quantity<=50294.33962/40
Quantity<=1257.358491