Use the Figure for the Question(s)below

question 2

Multiple Choice

Use the figure for the question(s) below.
-A maker of kitchenware is planning on selling a new chef-quality kitchen knife. The manufacturer expects to sell 1.6 million knives at a price of $120 each. These knives cost $80 each to produce. Selling, general, and administrative (SG&A) expenses are $500 000. The machinery required to produce the knives cost $1.4 million, depreciated by straight-line depreciation over five years. The maker determines that the EBIT break-even point for units sold and sale price is less than these estimates and that the EBIT break-even point for costs per unit, SG&A, and depreciation are greater than these estimates, so decides to go ahead with manufacturing the knife. Was this the correct decision?

• A)Yes, since a positive EBIT ensures that the project will have a positive net present value (NP
• V).
• B)No, since the cost per unit should be greater than the EBIT break-even point for cost of goods if the project is to have a positive EBIT.
• C)Yes, since if the estimates for each parameter are correct, the EBIT will be positive.
• D)It cannot be determined whether the decision was correct, since other factors contributing to the project's net present value (NP
• V), such as the upfront investment, have not been included in the analysis.

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Definitions:

Interest Rate Collar

A risk management strategy used to limit exposure to interest rate fluctuations by setting upper and lower bounds.

Risk Exposure

Risk exposure is the measure of potential future losses that may result from business activities or investment decisions, due to risks that have been taken.

Variable-Rate Loan

A loan in which the interest rate can change over time, based on an underlying benchmark interest rate or index.

Interest Rate Cap

A financial derivative contract that limits the maximum interest rate a borrower has to pay on a variable-rate loan.