Thompson & Son Have Been Busy Analyzing a New Product

question 162

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:

Negotiated

A process where two or more parties discuss terms and conditions to reach a mutual agreement.

Specific Payee

An individual or entity designated to receive a particular payment or benefit from a contractual agreement.

Blank Indorsement

An endorsement on a financial instrument, such as a check, that specifies no particular endorsee and can be transferred by mere delivery.

Bearer Paper

A negotiable instrument that is payable to whoever holds or presents it for payment.