We are examining a new project. We expect to sell 6,000 units per year at $74 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $74 Ã 6,000 = $444,000. The relevant discount rate is 18 percent, and the initial investment required is $1,710,000. After the first year, the project can be dismantled and sold for $1,540,000. Suppose you think it is likely that expected sales will be revised upward to 9,000 units if the first year is a success and revised downward to 4,600 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 $
PLEASE FOLLOW INSTRUCTIONS ON ROUNDING DECIMALS PLEASE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
We are examining a new project. We expect to sell 6,000 units per year at $74 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $74 Ã 6,000 = $444,000. The relevant discount rate is 18 percent, and the initial investment required is $1,710,000. After the first year, the project can be dismantled and sold for $1,540,000. Suppose you think it is likely that expected sales will be revised upward to 9,000 units if the first year is a success and revised downward to 4,600 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 $
PLEASE FOLLOW INSTRUCTIONS ON ROUNDING DECIMALS PLEASE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Related questions
| We are examining a new project. We expect to sell 6,000 units per year at $74 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $74 Ã 6,000 = $444,000. The relevant discount rate is 18 percent, and the initial investment required is $1,710,000. |
| a. | What is the base-case NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| NPV | $ |
| b. | After the first year, the project can be dismantled and sold for $1,540,000. If expected sales are revised based on the first yearâs performance, below what level of expected sales would it make sense to abandon the project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) |
| Level of expected sales | $ |
|
| 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 Ã 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 |
