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 $9.4 million for the next 8 years. Allied Products uses a discount rate of 15 percent for new product launches. The initial investment is $39.4 million. Assume that the project has no salvage value at the end of its economic life.

b. After the first year, the project can be dismantled and sold for $26.4 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? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16.)

Annual cash flows = $______________

Explanation / Answer

since project is abadon after 1 year ,remaining years = 8-1 = 7

Cash flow in cash project is abadon = Sale value / PVAF@7 years ,15%

                         = 26400000 / 4.16042

                           = $ 6,345,513.19

AT or below $ 6,345,513.19 ,it is better to abandon the project .

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