Question

you are preparing to produce some goods for sale. you will sell them in one year and you will incur costs of $78,000 immediately. if your cost of capital is 6.6% what is the minimum dollar amount you need to sell the goods for in order for this to be a non negative NPV?

Answer 1

A non negative NPV itself indicates that the value of net present value is to be zero.

Costs incurred = $78,000

This costs in incurred immediately i.e. it is incurred at the beginning.

Cost of capital is the return earned by company by investing in some investment. Cost of capital indicates that company will earn this return after investing in some specific risk.

Cost of capital = 6.6%

Now, we have to calculate how much is the minimum amount of dollar needs to be sold in order to get non negative NPV.

It means if company invested $78,000 at the beginning at rate of return of 6.6%, how much it should earn so that it,s NPV should be non negative.

Calculation of NPV:

Let, Sale value be x dollar amount which is to be earned.

Year	Particulars	Discounting Factor	Discounted Amount (Present Value)
0	Immediate cost incurred = $78,000	1	$78,000*1=$78,000
1	Annual revenue earned= $x	0.9381	$x * 0.9381= 0.9381x

Net present value being taken as zero as given.

Net present value = (-)$78000 + 0.9381x

0 = - $78,000+0.9381x

$78,000 = 0.9381x

$78,000/0.9381 = x

83146.79 = x

Therefore x = $83,146.79.

Hence we need to sell minimum $ 83,146.79 in order to get non negatuve NPV @ 6.6%.