Break-even time, working backward. Tennessee Instruments is considering manufacturing the S-Card, a new type of sound card for personal computers. The new product development committee will not approve a new-product proposal if it has a break-even time of more than four years. If the project is approved, the investments to make the S-Card will begin on January 1, Year 1. The projected sales for the S-Card are $5 million each year for Years 1 through 4. The costs of manufacturing, distribution, marketing, and customer service are expected to be $3 million each year.
Assume that all cash flow numbers are discounted cash flows.
a. What is the maximum cash investment that the new product development committee will agree to fund for the S-Card project?
b. Why might Tennessee specify a policy not to fund new product proposals with an estimated breakeven of more than four years?