Allied Products, Inc., is considering a new product launch. The firm expects to
ID: 2761928 • Letter: A
Question
Allied Products, Inc., is considering a new product launch. The firm expects to have annual operating cash flow of $9.7 million for the next 8 years. Allied Products uses a discount rate of 14 percent for new product launches. The initial investment is $39.7 million. Assume that the project has no salvage value at the end of its economic life.
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 $26.7 million. If the estimates of remaining cash flows are revised based on the first year’s experience, calculate the equivalent annual cash flows the project must earn to equal the aftertax salvage value. Assume the salvage value given is an aftertax value. (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 $9.7 million for the next 8 years. Allied Products uses a discount rate of 14 percent for new product launches. The initial investment is $39.7 million. Assume that the project has no salvage value at the end of its economic life.
Explanation / Answer
a.
NPV of the new product = $5,296,979.77
b.
Salvage value = $26,700,000
Equivalent annual cash flow = $26,700,000/((1-(1+14%)^-7)/14%) = $6,226,236.47
Equivalent annual cash flows the project must earn to equal the aftertax salvage value = $6,226,236.47
Note:
Discount rate = 14%
Years = 8 years - 1 year = 7 years because after 1 year it sold.
Year Cash flow ($) (A) PV factor (14%) (B) PV of Cash flow(A X B) 1 9,700,000.00 0.8772 8,508,771.93 2 9,700,000.00 0.7695 7,463,835.03 3 9,700,000.00 0.6750 6,547,223.71 4 9,700,000.00 0.5921 5,743,178.69 5 9,700,000.00 0.5194 5,037,876.04 6 9,700,000.00 0.4556 4,419,189.51 7 9,700,000.00 0.3996 3,876,482.03 8 9,700,000.00 0.3506 3,400,422.83 Total 44,996,979.77 Less: Initial Investment 39,700,000.00 NPV $5,296,979.77Related Questions
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