Quirk and Company Has Been Busy Analyzing a New Product

question 36

Multiple Choice

Quirk and Company has been busy analyzing a new product. It has determined that an operating cash flow of $18,500 will result in a zero net present value,which is a company requirement for project acceptance. The fixed costs are $14,000 and the contribution margin is $8.00. The company feels that it can realistically capture 10% of the 40,000 unit market for this product. Should the company develop the new product? Why or why not?

• A) No; because 4,000 units of sales is less than the quantity required for a zero net present value
• B) No; because the internal break-even point is greater than 4,000 units
• C) Yes; because the firm can generate sufficient sales to obtain at least a zero net present value
• D) Yes; because the project has an expected internal rate of return of 100%
• E) Yes; because the project will pay back on a discounted basis

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Definitions:

Confirmation Error

A cognitive bias that involves favoring information that confirms pre-existing beliefs or values, while disregarding evidence that contradicts them.

Escalating Commitment

The phenomenon where people increase their investment in a decision despite new evidence suggesting that the decision was wrong.

Framing Error

A cognitive bias where information is presented or perceived in such a way that it leads to incorrect conclusions or decisions.

Lack-of-participation Error

A bias or error in decision-making that occurs when not all stakeholders or team members are involved or engaged in the process.