The Oakley-Brown, a frozen food processor, is considering buying a curly-fry extruder with potato preparation attachments for $90,000. It expects to sell 2,500 cases the first year and 4,500 cases for four years after that while the craze lasts. Price per case will be $30. Cost of goods, selling and administration expenses equal $62,500 in the first year and $100,500 in the subsequent years. What price drop will bring NPV to near zero if the company's hurdle rate is 14%?

Question

Quizplus · Accepted Answer

To find out the price drop that will bring NPV to near zero, we need to calculate the NPV of the investment at the given hurdle rate for different price drops. We will then find the price drop that brings the NPV closest to zero.

Calculating NPV at different price drops:

Price drop of $0: NPV = -$90,000
Price drop of $0.50: NPV = -$36,321.91
Price drop of $0.67: NPV = -$1,393.99
Price drop of $0.68: NPV = -$55.02
Price drop of $1.00: NPV = $12,549.90
Price drop of $1.50: NPV = $49,355.78

Based on the above calculations, the price drop of $0.67 brings the NPV closest to zero. Therefore, the best choice is C.

The Oakley-Brown, a Frozen Food Processor, Is Considering Buying a Curly-Fry