🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
Finance
2
answers
0
watching
572
views
25 Aug 2019

Your firm is considering a project with a five-year life and an initial cost of $120,000. The discount rate for the project is 12%. The firm expects to sell 2,100 units a year. The cash flow per unit is $20. The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $50,000. At what level of sales should the firm be willing to abandon this project?

Watch
2
answers
0
watching
572
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Avatar image
Read by 4 people

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share
Elin Hessel
Elin HesselLv2
27 Aug 2019
Already have an account? Log in
Share

Related questions

Brewster’s is considering a project with a 5-year life and an initial cost of $120,000. The discount rate for the project is 12 percent. The firm expects to sell 2,100 units a year at a net cash flow per unit of $20. The firm will have the option to abandon this project after three years at which time it could sell the project for $50,000. The firm is interested in knowing how the project will perform if the sales forecasts for Years 4 and 5 of the project are revised such that there is a 50 percent chance the sales will be either 1,400 or 2,500 units a year. What is the net present value of this project given these revised sales forecasts?

A. $23,617

B. $23,719

C. $25,002

D. $26,877

E. $28,745 (This is the correct answer stated. How to you find this NPV?)

M Inc asks you to perform a feasibility study of a new video game that requires an initial investment of $8 million. M Inc. expects a total annual operating cash flow of $1.5 million for the next 10 years. The relevant discount rate is 10 percent. Cash flow occur at year-end.

After one year, the estimate of remaining annual cash flows will be revised wither upward to 2.75 million or downward to $345,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $3.1 million.

What is the revised NPV given that the firm can abandon the project after one year?

A Canadian firm, is evaluating a project in the United States. This project involves the
establishment of a lumber mill in Wisconsin to process Canadian timber. The factory expects to
service clients in the construction industry. All cash flow figures are in thousands.
Initial Investment. The initial investment is CAD 25,000. The project is over a period of three
years. This investment will be depreciated straight line to zero.
Operating Results. The firm expects two equally likely scenarios for the first year of operations.
Under the favorable scenario, the firm expects to produce and sell 1,200 units of a product. Under
the unfavorable scenario, it expects to produce and sell only 600 units. The selling price is
expected to be CAD 25; the variable expense is expected to be CAD 10, and fixed costs
excluding depreciation are expected to be CAD 3,500.
Additional Investment. If the firm encounters the favorable scenario during year 1, it could make
an investment of CAD 15,000 to enable it to produce and sell a total of 3,500 units (additional
units is 2,300) in the second and third years. The cost parameters remain unchanged with the
exception of depreciation. This secondary investment will be depreciated equally in years 2 and 3.
If the firm chooses not to make the investment in year 1, the results of year 1 will be repeated
during years 2 and 3.
Discount Rate and Miscellaneous. Assume a discount rate of 9 percent and zero taxes.

a. Estimate the NPV of the project.
b. Estimate the NPV of the option to expand.

Related Documents

FIN 300
Final Exam
Study Guide
FIN 300 Final: FIN300 cheatsheet
ultramarinegoat162
FIN 3104
Final Exam
Study Guide
FIN 3104 Study Guide - Final Guide: Sensitivity Analysis, Systematic Risk, Public Company
purpleduck94
FIN 3715
Final Exam
Study Guide
FIN 3715 : FIN 3715 Practice Test 2
azuremammoth471

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in