Suppose a manager is deciding whether or not to purchase a piece of equipment to make an input internally and has completed the majority of the net present value (NPV)calculations. The manager has correctly calculated the NPV to be equal to: NPV = ($1.052 × Q)- $250,000, where Q is the annual quantity of the input the firm needs. In order for the NPV to be positive, the firm needs at least _______units of the input each year.
A)220,890
B)237,643
C)115,960
D)259,600

Question

Quizplus · Accepted Answer

We need to solve for Q in the equation:

NPV = ($1.052 × Q)- $250,000

Setting NPV equal to zero and solving for Q:

0 = ($1.052 × Q)- $250,000
$250,000 = $1.052 × Q
Q = $250,000 ÷ $1.052
Q = 237,643 (rounded to the nearest whole number)

Therefore, the firm needs at least 237,643 units of the input each year for the NPV to be positive. The best choice is B.

Suppose a Manager Is Deciding Whether or Not to Purchase