Clive Inc. has been busy analyzing a new product. Thus far, management has deter

Question

Clive Inc. has been busy analyzing a new product. Thus far, management has determined that an OCF of $218,200 will result in a zero net present value for the project, which is the minimum requirement for project acceptance. The fixed costs are $329,000 and the contribution margin per unit is $216.40. The company feels that it can realistically capture 2.5% of the 110,000 unit market for this product. The tax rate is 34% and the required rate of return is 11%.

Should the company develop the new product? Why or why not?

Explanation / Answer

110,000*.0275=2,750 units.

2,750units * 216.40= $595,100

($595,100-$329,000)(1-.34)=$175,626 OCF

Doesn't appear OCF is high enough so the company should not do project.

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