What is the net present value of this project given your sales forecasts?

Your firm is considering a project with a five-year life and an initial cost of $120,000. The
discount rate for the project is 12%. The firm expects to sell 2,100 units a year. The cash flow
per unit is $20. The firm will have the option to abandon this project after three years at which
time it expects it could sell the project for $50,000. You are interested in knowing how the
project will perform if the sales forecasts for years four and five of the project are revised such
that there is a 50% chance that the sales will be either 1,400 or 2,500 units a year. What is the
net present value of this project given your sales forecasts?
a. $23,617
b. $23,719
c. $25,002
d. $26,877
e. $28,746

Ronnie’s Custom Cars purchased some fixed assets two years ago for $39,000. The assets are
classified as 5-year property for MACRS. Ronnie is considering selling these assets now so he
can buy some newer fixed assets which utilize the latest in technology. Ronnie has been
offered $19,000 for his old assets. What is the net cash flow from the salvage value if the tax
rate is 34%?
MACRS 5-year property
Year Rate
1 20.00%
2 32.00%
3 19.20%
4 11.52%
5 11.52%
6 5.76%
a. $16,358.88
b. $17,909.09
c. $18,720.00
d. $18,904.80
e. $19,000.00

Your firm is considering a project with a five-year life and an initial cost of $120,000. The
discount rate for the project is 12%. The firm expects to sell 2,100 units a year. The cash flow
per unit is $20. The firm will have the option to abandon this project after three years at which
time it expects it could sell the project for $50,000. At what level of sales should the firm be
willing to abandon this project?
a. 420 units
b. 1,041 units
c. 1,479 units
d. 1,618 units
e. 2,500 units