Quirk and Company has been busy analyzing a new product. It has determined that an operating cash flow of $18,500 will result in a zero net present value,which is a company requirement for project acceptance. The fixed costs are $14,000 and the contribution margin is $8.00. The company feels that it can realistically capture 10% of the 40,000 unit market for this product. Should the company develop the new product? Why or why not?
A) No; because 4,000 units of sales is less than the quantity required for a zero net present value
B) No; because the internal break-even point is greater than 4,000 units
C) Yes; because the firm can generate sufficient sales to obtain at least a zero net present value
D) Yes; because the project has an expected internal rate of return of 100%
E) Yes; because the project will pay back on a discounted basis

Question

Quizplus · Accepted Answer

The company can capture 10% of the 40,000 unit market, which is 4,000 units. The contribution margin per unit is $8, so the total contribution margin is $32,000. After covering the fixed costs of $14,000, the operating cash flow is $18,000, which is less than the required $18,500 for a zero NPV.

Quirk and Company Has Been Busy Analyzing a New Product