Applied Nanotech is thinking about introducing a new surface cleaning machine. T

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 $300,000 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 $14.8 million initial investment. The finance department has estimated that a discount rate of 16 percent should be used.

If unsuccessful, after the first year the project can be dismantled and will have an aftertax salvage value of $11.7 million. Also, after the first year, expected cash flows will be revised up to 19 units per year or to 0 units, with equal probability. What is the NPV?

A.

$1,228,379.51

B.

$1,221,323.48

C.

$1,138,343.61

D.

$1,123,387.87

If unsuccessful, after the first year the project can be dismantled and will have an aftertax salvage value of $11.7 million. Also, after the first year, expected cash flows will be revised up to 19 units per year or to 0 units, with equal probability. What is the NPV?

A.

$1,228,379.51

B.

$1,221,323.48

C.

$1,138,343.61

D.

$1,123,387.87

Explanation / Answer

Year Cashflow PV @ 16% 0 -       14,800,000 -       14,800,000 1            4,500,000            3,879,310 2            5,700,000            4,236,029 3            5,700,000            3,651,749 4            5,700,000            3,148,059 5            5,700,000            2,713,844 NPV            1,138,344

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