We are examining a new project. We expect to sell 9,000 units per year at $45 net cash flow apiece for the next 20 years. In other words, the annual operating cash flow is projected to be $45 *9,000 = $405,000. The relevant discount rate is 14 percent, and the initial investment required is $1,730,000. After the first year, the project can be dismantled and sold for $1,350,000. If expected sales are revised based on the first year's performance, it would make sense to abandon the investment if the sales are less than which of the following number of units?

Question

Quizplus · Accepted Answer

$1,350,000 = ($45)(Q)(PVIFA_{14%, 19}); Q = 4,580 unitsAbandon the project if Q < 4,580 units because the NPV of abandoning the project is greater than the NPV of the future cash flows.

We Are Examining a New Project