Applied Nanotech is thinking about introducing a new surface cleaning machine. T
ID: 2649614 • Letter: A
Question
Applied Nanotech is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that Applied Nanotech can sell 15 units per year at $305,000 net cash flow per unit for the next five years. The engineering department has come up with the estimate that developing the machine will take a $15 million initial investment. The finance department has estimated that a 16 percent discount rate should be used.
What is the base-case NPV?
2. if unsuccessful, after the first year the project can be dismantled and will have an aftertax salvage value of $11 million. Also, after the first year, expected Cashflows will be revised up to 20 units per year or to 0 units, with equal probability. What is the revised NPV?
What is the base-case NPV?
2. if unsuccessful, after the first year the project can be dismantled and will have an aftertax salvage value of $11 million. Also, after the first year, expected Cashflows will be revised up to 20 units per year or to 0 units, with equal probability. What is the revised NPV?
Explanation / Answer
Statement showing calculation of Present Value Particulars Time PVF@16% Amount PV Cash Outflows - 1.00 (15,000,000.00) (15,000,000.00) PV of cash Outflows (15,000,000.00) Cash Inflows(15*305,000) 1.00 0.8621 4,575,000.00 3,943,965.52 Cash Inflows(15*305,000) 2.00 0.7432 4,575,000.00 3,399,970.27 Cash Inflows(15*305,000) 3.00 0.6407 4,575,000.00 2,931,008.86 Cash Inflows(15*305,000) 4.00 0.5523 4,575,000.00 2,526,731.77 Cash Inflows(15*305,000) 5.00 0.4761 4,575,000.00 2,178,217.05 PV of Cash Inflows 3.2743 14,979,893.47 NPV (20,106.53) Time PVF Working Notes 1.00 0.8621 1/1.16 2.00 0.7432 .8621/1.16 3.00 0.6407 .7432/1.16 4.00 0.5523 .6407/1.16 5.00 0.4761 .5523/1.16 If project is dismantled after 1 year Statement showing calculation of Present Value Particulars Time PVF@16% Amount PV Cash Outflows - 1.00 (15,000,000.00) (15,000,000.00) PV of cash Outflows (15,000,000.00) Cash Inflows(15*305,000) 1.00 0.8621 4,575,000.00 3,943,965.52 Cash Inflows (Salvage Value) 1.00 0.8621 11,000,000.00 9,482,758.62 PV of Cash Inflows 1.7241 13,426,724.14 NPV (1,573,275.86) Time PVF Working Notes 1.00 0.8621 1/1.16 2.00 0.7432 .8621/1.16 If project is continued with equal prob of 0 or 20 Units Statement showing calculation of Present Value Particulars Time PVF@16% Amount PV Cash Outflows - 1.00 (15,000,000.00) (15,000,000.00) PV of cash Outflows (15,000,000.00) Cash Inflows(15*305,000) 1.00 0.8621 4,575,000.00 3,943,965.52 Cash Inflows(15*305,000) 2.00 0.7432 3,050,000.00 2,266,646.85 Cash Inflows(15*305,000) 3.00 0.6407 3,050,000.00 1,954,005.90 Cash Inflows(15*305,000) 4.00 0.5523 3,050,000.00 1,684,487.85 Cash Inflows(15*305,000) 5.00 0.4761 3,050,000.00 1,452,144.70 PV of Cash Inflows 3.2743 11,301,250.82 NPV (3,698,749.18) Time PVF Working Notes 1.00 0.8621 1/1.16 2.00 0.7432 .8621/1.16 3.00 0.6407 .7432/1.16 4.00 0.5523 .6407/1.16 5.00 0.4761 .5523/1.16 Particulars 20 Units O Units No of units 20.00 - SP Per unit 305,000.00 305,000.00 Sale Value 6,100,000.00 - Probability 0.50 0.5000 Net Sales 3,050,000.00 -
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