If Untel Inc

question 1

Multiple Choice

If Untel Inc. decides to manufacture a new generation of computer chips with a brief 2 year product life cycle, it expects to sell 1 million units each year. Variable cost per unit will be $75, fixed costs $5 million, and depreciation $3 million. The initial investment will be $22.91 million. Untel uses a discount rate of 10%; its marginal tax rate is 40%. To reach break-even NPV, UNTEL must sell the chips for at least ________ each.

• A) $87
• B) $105
• C) $100
• D) $1,000

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Definitions:

Security Prices

The cost at which a particular financial security, such as stocks or bonds, is bought or sold in the market.

Intrinsic Value

The actual, fundamental worth of an asset, investment, or company, often calculated using financial analysis and excluding market price fluctuations.

Call Option

A financial contract giving the buyer the right, but not the obligation, to buy an asset at a specified price within a specific time period.

Time Premium

The portion of an option's price that exceeds its intrinsic value, representing the value placed on the remaining time until expiration.