Question

You have determined that an OCF of $151,406 will result in a zero net present value for a project, which is the minimum requirement for project acceptance. The fixed costs are $387,200 and the contribution margin per unit is $56.11. The company feels that it can realistically capture 8.5 percent of the 140,000 unit market for this product. The tax rate is 21 percent and the required rate of return is 13 percent. Should the company develop the new product? Why or why not?

Answer 1

Answer:

It should be accepted as the cash flow is greater than minimum

Explanation:

We should determinate if he project can generate a cashflow of 151,406 after taxes to be accepted:

market x market share = sales in units

140,000 units x 8.5% = 11,900 units

sales x contribution less fixed cost = income before taxes

11,900 x 56.11 - 387,200= 280,509

after tax 280,509 x (1 - 21%) = 221,602.11‬

project cash flow > minimum cash flow

      221,602.11      >         151,406

It should be accepted as the cash flow is greater than minimum