Answer:
875 units or less
Explanation:
5 year project $220,000
discount rate 11%
cash flow per year = 2,900 units x $40 = $116,000
after year 3, the project's assets should have a salvage value of $60,000
year cash flow
0 -220,000
1 116,000
2 116,000
3 116,000
4 116,000
5 116,000
the project's NPV = $208,724
year cash flow
0 -220,000
1 116,000
2 116,000
3 176,000
the NPV of the first 3 years, including salvage value = $107,342
the difference between both NPVs = $208,724 - $107,342 = $101,382
to determine the number of units sold to make abandoning the project more profitable:
101,382 = x/1.11⁴ + x/1.11⁵ = 0.65873x + 0.59345x = 1.25218x
x = 101,382 / 1.25218 = 80,964 / $40 per unit = 2,024.1 ⇒ 2,025 units
so the units sold during years 4 and 5 should be = 2,900 - 2,025 = 875
if total sales lower to 875 units during years 4 and 5, the cash flows should be:
year cash flow
0 -220,000
1 116,000
2 116,000
3 116,000
4 35,000
5 35,000
the NPV = $107,297, which is actually lower than the NPV obtained by abandoning the project in year 3.
