Q

1,170)720

So, Wettway needs to sell about 84 boats per year. This is not good news.

As indicated in Figure 11.5, the financial break-even is substantially higher than the accounting break-even point. This will often be the case. Moreover, what we have discovered is that the sailboat project has a substantial degree of forecasting risk. We project sales of 85 boats per year, but it takes 84 just to earn the required return.

Conclusion Overall, it seems unlikely that the Wettway sailboat project would fail to break even on an accounting basis. However, there appears to be a very good chance that the true NPV is negative. This illustrates the danger in looking at just the accounting break-even.

What should Wettway do? Is the new project all wet? The decision at this point is essentially a managerial issue—a judgment call. The crucial questions are:

CHAPTER 11 Project Analysis and Evaluation 367

1. How much confidence do we have in our projections?

2. How important is the project to the future of the company?

3. How badly will the company be hurt if sales do turn out to be low? What options are available to the company in this case?

We will consider questions such as these in a later section. For future reference, our discussion of the different break-even measures is summarized in Table 11.1.

Ross et al.: Fundamentals IV. Capital Budgeting 11. Project Analysis and of Corporate Finance, Sixth Evaluation

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