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), and the cash break-even point is calculated as fixed costs divided by the contribution margin, which is less than 5,000 units. Thus, they can achieve a zero net present value.

Thompson & Son Have Been Busy Analyzing a New Product