Western Industrial Products is considering a project with a life of four years, a discount rate of 14.7 percent, and an initial cost of $268,000. The project is expected to produce sales of 2,100 units on the last day of each year. The cash flow per unit is $50. The firm will have the option to abandon the 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 sales 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.

Question

Quizplus · Accepted Answer

The project should be abandoned if the expected level of annual sales, starting with Year 2, falls to 1,961 units or less. This is because the NPV of the project is negative if sales are less than 1,961 units per year.

Western Industrial Products Is Considering a Project with a Life