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We are examining a new project We expect to sell 5900 units per year at $73 net cash flow apiece for the next 10 years In other words the annual cash flow is projected to be

We are examining a new project. We expect to sell 5,900 units per year at $73 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $73 × 5,900 = $430,700. The relevant discount rate is 16 percent, and the initial investment required is $1,700,000. After the first year, the project can be dismantled and sold for $1,530,000. Suppose you think it is likely that expected sales will be revised upward to 8,900 units if the first year is a success and revised downward to 4,500 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 $  

Apr 08 2020 View more View Less

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