Allied Products, Inc., is considering a new product launch. The firm expects to

Question

Allied Products, Inc., is considering a new product launch. The firm expects to have annual operating cash flow of $9.6 million for the next 9 years. Allied Products uses a discount rate of 13 percent for new product launches. The initial investment is $39.6 million. Assume that the project has no salvage value at the end of its economic life. (Do not round intermediate calculations.)

What is the NPV of the new product? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Round your answer to 2 decimal places. (e.g., 32.16))

After the first year, the project can be dismantled and sold for $26.6 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Round your answer to 2 decimal places. (e.g., 32.16))

Allied Products, Inc., is considering a new product launch. The firm expects to have annual operating cash flow of $9.6 million for the next 9 years. Allied Products uses a discount rate of 13 percent for new product launches. The initial investment is $39.6 million. Assume that the project has no salvage value at the end of its economic life. (Do not round intermediate calculations.)

Explanation / Answer

Solution-a

NPV = -$39,600,000 + $6,900,000 (PVIFA13%, 9)

NPV = -$39,600,000 + $6,900,000 (4.9464)

NPV = -$5,469,840

Solution-b

After-tax salvage value = C2 (PVIFA 13%, 8)

$26,600,000 = C2 (4.7988)

C2 = $26,600,000 / 4.7988

C2 = $5,543,052.42

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