Thompson & Son has been busy analyzing a new product. It has 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 it can realistically capture 10% 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 internal 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%
E) No; because the project will not pay back on a discounted basis

Question

Quizplus · Accepted Answer

The company can capture 10% of the 50,000 unit market, which is 5,000 units. The contribution margin per unit is $6.20, so the total contribution margin for 5,000 units is $31,000. After covering the fixed costs of $12,378, the operating cash flow is $18,622, which exceeds the required $16,700 for a zero net present value.

Thompson & Son Has Been Busy Analyzing a New Product