Question

Margerit is reviewing a project with projected sales of 1,500 units a year, a cashflow of $40 a unit and a three-year project life. The initial cost of the project is$95,000. The relevant discount rate is 15%. Margerit has the option to abandonthe project after one year at which time she feels she could sell the project for$60,000. At what level of sales should she be willing to abandon the project

Answer 1

Answer: 923 units

Explanation:

Margerit should abandon the project in a year if the cashflow associated with the project brings in a present value of less than or equal to $60,000 in a year.

The present value in year one should be set at $60,000.

The cashflow for the two years at a present value of $60,000 would be:

60,000 = Amount * Present value interest factor of an annuity, 2 periods, 15%

60,000 = Amount * 1.6257

Amount = 60,000 / 1.6257

= $36,907

The above is the amount received per sales that she should abandon the project at.

In units this is:

= 36,907 / 40 per unit

= 923 units