We are examining a new project. We expect to sell 5,400 units per year at $68 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $68 x 5,400...


We are examining a new project. We expect to sell 5,400 units per year at $68 net cash flow apiece for the<br>next 10 years. In other words, the annual operating cash flow is projected to be $68 x 5,400 = 5367,200.<br>The relevant discount rate is 18 percent, and the initial investment required is $1,530,000. After the first<br>year, the project can be dismantled and sold for $1,250,000. Suppose you think it is likely that expected<br>sales will be revised upward to 8,400 units if the first year is a success and revised downward to 4,000 units<br>if the first year is not a success.<br>a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of<br>abandonment in answering. (Do not round intermediate calculations and round your answer to 2<br>decimal places, e.g., 32.16.)<br>NPV<br>b. What is the value of the option to abandon? (Do not round intermediate calculations and round your<br>answer to 2 decimal places, e.g., 32.16.)<br>Option value<br>

Extracted text: We are examining a new project. We expect to sell 5,400 units per year at $68 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $68 x 5,400 = 5367,200. The relevant discount rate is 18 percent, and the initial investment required is $1,530,000. After the first year, the project can be dismantled and sold for $1,250,000. Suppose you think it is likely that expected sales will be revised upward to 8,400 units if the first year is a success and revised downward to 4,000 units if the first year is not a success. a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV b. What is the value of the option to abandon? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Option value

Jun 06, 2022
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