We are examining a new project. We expect to sell 5,200 units per year at $66 ne
ID: 2752216 • Letter: W
Question
We are examining a new project. We expect to sell 5,200 units per year at $66 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $66 × 5,200 = $343,200. The relevant discount rate is 17 percent, and the initial investment required is $1,510,000. After the first year, the project can be dismantled and sold for $1,230,000. Suppose you think it is likely that expected sales will be revised upward to 8,200 units if the first year is a success and revised downward to 3,800 units if the first year is not a success.
a.
If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
NPV
$
b.
What is the value of the option to abandon? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Option value
$
We are examining a new project. We expect to sell 5,200 units per year at $66 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $66 × 5,200 = $343,200. The relevant discount rate is 17 percent, and the initial investment required is $1,510,000. After the first year, the project can be dismantled and sold for $1,230,000. Suppose you think it is likely that expected sales will be revised upward to 8,200 units if the first year is a success and revised downward to 3,800 units if the first year is not a success.
Explanation / Answer
in case the option is a failure and sold off then
normal cash flows of the company Year Cash Flows Disc@17% Disc cash Flows 0 ($1,510,000) 1 ($1,510,000) 1 to 10 $343,200 4.659 $1,598,968.80 NPV $88,968.80Related Questions
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