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 16 units per year at $313,000 net cash flow per unit for the next four years. The engineering department has come up with the estimate that developing the machine will take a $15.6 million initial investment. The finance department has estimated that a discount rate of 11 percent should be used. If unsuccessful, after the first year the project can be dismantled and will have an aftertax salvage value of $11.8 million. Also, after the first year, expected cash flows will be revised up to 21 units per year or to 0 units, with equal probability. What is the NPV?

Explanation / Answer

Year Scenario 1 Scenario 2 0 -15600000 -15600000 1 5008000 16808000 2 6573000 3 6573000 4 6573000 present value $ 18,982,465.61 $ 15,142,342.34 NPV $ 3,382,465.61 $ -457,657.66 Probability 0.5 0.5 Expected NPV $ 1,691,232.80 $ -228,828.83 $ 1,462,403.98 CF from 16 units 313000*16 5008000 Cf from 21 units 313000*21 6573000 Sale proceeds of Project 11800000 For Scenario 2 16808000

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