Question

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

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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