Cantor's has been busy analyzing a new product. Thus far, management has determined that an OCF of $218,200 will result in a zero net present value for the project, which is the minimum requirement for project acceptance. The fixed costs are $329,000 and the contribution margin per unit is $216.40. The company feels that it can realistically capture 2.5 percent of the 110,000 unit market for this product. The tax rate is 34 percent and the required rate of return is 11 percent. Should the company develop the new product? Why or why not?
A)Yes; The project's expected IRR exceeds the required rate of return.
B)Yes; The expected level of sales exceeds the required level of production.
C)No; The required level of production exceeds the expected level of sales.
D)No; The IRR is less than the required rate of return.
E)No; The project will never payback on a discounted basis.

Question

Quizplus · Accepted Answer

Financial break-even point = ($329,000 + $218,200)/$216.40 = 2,528.65 unitsExpected sales = 110,000 F1F1F1S1F1F1F10 0.025 = 2,750 units.The project should be accepted because the expected level of sales is greater than the financial break-even quantity.

Cantor's Has Been Busy Analyzing a New Product