Question
Eta Co is considering a five-year project with an initial investment of $2 million and a required rate of return of 12%. The project involves
Eta Co is considering a five-year project with an initial investment of $2 million and a required rate of return of 12%. The project involves the manufacture of toys. Eta estimates that the toys will sell at $30 per unit. The variable cost of producing the toys is $20 per unit. The fixed costs are included in the initial investment. Sales volume is estimated to be 150,000 units per year. After five years, Eta will not be able to receive cash flows from the project in any form. Eta is concerned that the actual sales volume may be less than what was estimated.
What is the sales volume that the project needs to fall to before the NPV becomes zero? (Round the final answer to the nearest two digits.)
Step by Step Solution
3.51 Rating (144 Votes )
There are 3 Steps involved in it
Step: 1
To determine the sales volume at which the net present value NPV of the project becomes zero we need to calculate the cash flows for each year and discount them to their present value Given Initial in...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started