Question

Consider the following project for Hand Clapper, Inc. The company is considering a 4-
year project to manufacture clap-command garage door openers. This project requires an
initial investment of \$16.7 million that will be depreciated straight-line to zero over the
project’s life. An initial investment in net working capital of \$1,070,000 is required to
support spare parts inventory; this cost is fully recoverable whenever the project ends.
The company believes it can generate \$14.3 million in revenues with \$5.8 million in
operating costs. The tax rate is 22 percent and the discount rate is 14 percent. The
market value of the equipment over the life of the project is as follows:

Year Market Value (\$ millions)
1 \$ 14.70
2 11.70
3 9.20
4 1.95
a. Assuming Hand Clapper operates this project for four years, what is the NPV?
b. Compute the project NPV assuming the project is abandoned after only one year.
c. Compute the project NPV assuming the project is abandoned after only two years.
d. Compute the project NPV assuming the project is abandoned after only three
years.

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