We are examining a new project. We expect to sell 8,500 units per year at $175 net cash flow apiece (including CCA) for the next 16 years. In other words, the annual operating cash flow is projected to be $175 x 8,500 - $1,487,500. The relevant discount rate is 19%, and the initial investment required is $4,947,000. Suppose you think it is likely that expected sales will be revised upward to 9,250 units if the first year is a success and revised downward to 4,050 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. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV $ b. After the first year, the project can be dismantled and sold for $2,517,000. What is the value of the option to abandon? (Negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) The value of the option to abandon $

We are examining a new project. We expect to sell 8,500 units per year at $175 net cash flow apiece (including CCA) for the next 16 years. In other words, the annual operating cash flow is projected to be $175 x 8,500 - $1,487,500. The relevant discount rate is 19%, and the initial investment required is $4,947,000. Suppose you think it is likely that expected sales will be revised upward to 9,250 units if the first year is a success and revised downward to 4,050 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. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV $ b. After the first year, the project can be dismantled and sold for $2,517,000. What is the value of the option to abandon? (Negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) The value of the option to abandon $

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 20P

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