Question

Assume that a firm wants to add staplers to their product line and sell each unit for $15. Staplers cost $5 per unit to manufacture. Assuming incremental fixed costs are $10,000, what can we say with certainty about the project?

A. If 1,000 units are sold, (cash break even), the project has a negative NPV.

B. The project should be rejected.

C. The project should be accepted.

D. If 1,000 units are sold (cash break even), the project has a positive NPV.

Answer 1

Ech Stapler Revenue = $15 and Cost =$5, so Profit = $10 per stapler. Now initial set up cost = $10,000

With 1000 pieces sold in lets say after 1 year, cash break even happens , but We get 10,000 dollars after some time of investment into fixed costs. Hence we can be sure that @1000 pieces, NPV is going to be negative.

Whether the project is to be rejected or accepted is dependent on how many staplers sell and internal rate of return and hence the only thing we cna say for sure is

A. If 100 units are sold then project has negative NPV