Question

Approximately how much was paid to invest in a project that has an NPV break-even level...

Approximately how much was paid to invest in a project that has an NPV break-even level of sales of $5 million? The project has annual cash flows determined by: [0.10 × sales - $300,000], a six-year life, and a 5 percent discount rate? Select one: a. $2,311,450 b. $940,555 c. $983,460 d. $1,015,138 e. $924,580

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Answer #1
Breakeven cashflows 0.10*Sales-300000
0.10*5000000-300000
$200,000
Let the initial investment be $x
Year Cashflow ($) Discounting factor @ 5% PV of cashflows ($)
0 -x 1 -x
1 200000 0.952380952 190476.19
2 200000 0.907029478 181405.90
3 200000 0.863837599 172767.52
4 200000 0.822702475 164540.49
5 200000 0.783526166 156705.23
6 200000 0.746215397 149243.08
NPV 1015138.41-x
We know,
Break-even NPV is the point where NPV is zero.
Therefore, equating
1015138.41-x=0
x= 1015138.41
Initial investment= $1015138
Answer: Option D
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