Western Industrial Products is considering a project with a four-year life and an initial cost of $212,000.The discount rate for the project is 16 percent.The firm expects to sell 9,600 units on the last day of each year.The cash flow per unit is $50.The firm will have the option to abandon this project at the end of year one (after year one's sales)at which time the project's assets could be sold for an estimated $125,000.The firm should abandon the project at the end of year one if the expected level of annual sales,starting with year 2,falls to _____ units or less.Ignore taxes.

Question

Quizplus · Accepted Answer

The correct answer is A.The project should be abandoned if the expected level of annual sales, starting with year 2, falls to 1,113 units or less. This is because the present value of the cash flows from continuing the project for years 2, 3, and 4 is less than the salvage value of the project at the end of year 1.

Western Industrial Products Is Considering a Project with a Four-Year