Thompson & Son Have Been Busy Analyzing a New Product

question 294

Multiple Choice

Thompson & Son have been busy analyzing a new product. They have determined that an operating cash flow of $16,700 will result in a zero net present value, which is a company requirement for project acceptance. The fixed costs are $12,378 and the contribution margin is $6.20. The company feels that they can realistically capture 10 percent of the 50,000 unit market for this product. Should the company develop the new product? Why or why not?

• A) Yes; because 5,000 units of sales exceeds the quantity required for a zero net present value.
• B) Yes; because the cash break-even point is less than 5,000 units.
• C) No; because the firm cannot generate sufficient sales to obtain at least a zero net present value.
• D) No; because the project has an expected internal rate of return of negative 100 percent.
• E) No; because the project will not pay back on a discounted basis.

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Definitions:

Frictional Unemployment

Unemployment that occurs when people are between jobs or are entering the labor force for the first time.

Cyclical Unemployment

A type of unemployment that relates to the cyclical trends in the business cycle, increasing during recessions and decreasing in expansions.

Unemployment Spells

Periods of time during which an individual is searching for employment but is unable to find work.

Frictional Unemployment

Temporary unemployment existing in a job market due to time taken by workers to move between jobs, including new or re-entering workers.