solution

Grace is reviewing a project with projected sales of 4,200 units a year, a cash flow of $28 a unit, and a four-year project life. Assume all operating cash flows occur on the last day of each year. The initial cost of the project is $247,000. The relevant discount rate is 13 percent. Grace has the option to abandon the project after two years at which time she feels she could sell the project’s assets for $110,000. At what level of annual sales, starting in year 3, should she be willing to abandon this project?

a) 2,355 units

b) 2,367 units

c) 2,119 units

d) 2,516 units