Question

q 12A company is reviewing a project with projected sales of 2,360 units a year, a cash flow of $63 a unit, and a three-year project life. The initial cost of the project is $145,150. The relevant discount rate is 17.50%. The company has the option to abandon the project after one year at which time the project can be sold for $80,100. Only at the end of the first year of operation, the company will get to find out the actual level of annual sales for all three years. What is the highest level of sales (in units) below which the company should be willing to abandon the project at the end of year 1?

Answer 1

What is the highest level of sales (in units) below which the company should be willing to abandon the project at the end of year 1:-

If Project is abandon at the end of year 1:

(Units * Cash flow per unit) * (PVIF 17.50%, 1 year) + Project sold at the end of year 1(PVIF 17.50%, 1 year)

(Units * $63) * (0.85106) + ($80100 * 0.85106)

53.61678 Units + $68169.906

If Project is continue at the end of year 1:

(Units * Cash flow per unit) * (PVAF 17.50%, 3 year)

(Units * $63) * 2.19181

138.08403 Units

If Project is abandon at the end of year 1 = If Project is continue at the end of year 1

53.61678 Units + $68169.906 = 138.08403 Units

807 Units