Young Pharmaceuticals is considering a drug project that costs $2.42 million today and is expected to generate end-of-year annual cash flows of $211,000 forever. At what discount rate would the company be indifferent between accepting or rejecting the project?

At 8.72% the company would be indifferent between accepting or rejecting the project

Explanation:

To be indifferent to accepting or rejecting the project, the initial cost of the project should equal the present value of all expected cash inflow to the project i.e. the Break-even point which is the point at which revenue = cost, thereby generating zero profit.

From the question, Young Pharmaceuticals is investing $2.42 million and expects an annual year end cash flow of $211,000 forever. We therefore apply the annuity to perpetuity formula

PV of perpetuity = Periodic cashflow/interest rate

cross multiply and make Interest the subject of the formular

= Interest = Periodic cashflow/PV of perpetuity

i = 211000/2420000

= 0.0872

= 8.72%

a manufacturer of printed circuit boards uses exponential smoothing with trend to forecast monthly demand of its product. at the end of december, the company wishes to forecast sales for january. the estimate of trend through november has been 200 additional boards sold per month. average sales have been around 1000 units per month. the demand for december was 1100 units. the company uses α = 0.20 and β = 0.10. make a forecast including trend for the month of january.