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

 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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