Western Industrial Products is considering a project with a four-year life and an initial cost of $268,000. The discount rate for the project is 14.5 percent. The firm expects to sell 2,200 units on the last day of each year. The cash flow per unit is $50. The firm will have the option to abandon this project after one year at which time the project's assets could be sold for an estimated $225,000. The firm should abandon the project immediately following the sale on the last day of the first year if the expected level of annual sales, starting with year 2, falls to _____ units or less. Ignore taxes. A. 1,955 units B. 1,667 units C. 1,922 units D. 2,034 units E. 2,108 units
Present value of cash flow must be equals to sale value of assets at the end of year 1 from abandonment of project in order to breakeven.
Present value of cash flow from year 1-3 =PVA14.5%,3* Cash flow per unit *Number of units
225000 = 2.30229*50*number of units
225000 = 115.1145 *number of units
Number of units = 225000/115.1145
= 1954.57 (rounded to 1955)
The firm should abandon the project immediately following the sale on the last day of the first year if the expected level of annual sales, starting with year 2, falls to 1955 or less /.
correct option is "A"
**Find present value annuity factor using financial calculator where i =14.5% ,n= 3 (since out of 4 years ,1 year is expired) PMT = 1
Western Industrial Products is considering a project with a four-year life and an initial cost of $268,000. The discount rate for the project is 14.5 percent. The firm expects to sell 2,200 units on t...
Western Industrial Products is considering a project with a four-year life and an initial cost of $268,000. The discount rate for the project is 14.5 percent. The firm expects to sell 2,200 units on the last day of each year. The cash flow per unit is $50. The firm will have the option to abandon this project after one year at which time the project's assets could be sold for an estimated $225,000. The firm should abandon the project immediately...
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...
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...
Your firm is considering a project with a five-year life and an initial cost of $120,000. The discount rate for the project is 10%. The firm expects to sell 2,100 units a year. The expected cash flow per unit is $20. The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $75,000. If this project sees units fall to 1,960 in the last two years, then...
Your firm is considering a project with a five-year life and an initial cost of $120,000. The discount rate for the project is 10%. The firm expects to sell 2,100 units a year. The expected cash flow per unit is $20. The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $75,000. If this project sees units fall to 1,960 in the last two years, then...