We are examining a new project. We expect to sell 8,750 units per year at $189 net cash flow aplece (including CCA) for the next 16 years. In other words, the annual operating cash flow is projected to be $189 * 8,750 - $1,653,750. The relevant discount rate is 14%, and the initial investment required is $5,500,000. After the first year, the project can be dismantled and sold for $2.800,000. If expected sales are revised based on the first year's performance. Suppose you think it is likely that expected sales will be revised upward to 9,500 units if the first year is a success and revised downward to 4,300 units if the first year is not a success. Supposed the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project is a success. This implies that if the project is a success, projected sales after expansion will be 17.600 Assume that success and fallure are equally likely Note that abandonment is still an option if the project is a failure a. What is the NPV of the project? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV b. What is the value of the option to expand? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) The value of the option to expand
We are examining a new project. We expect to sell 8,750 units per year at $189 net cash flow aplece (including CCA) for the next 16 years. In other words, the annual operating cash flow is projected to be $189 * 8,750 - $1,653,750. The relevant discount rate is 14%, and the initial investment required is $5,500,000. After the first year, the project can be dismantled and sold for $2.800,000. If expected sales are revised based on the first year's performance. Suppose you think it is likely that expected sales will be revised upward to 9,500 units if the first year is a success and revised downward to 4,300 units if the first year is not a success. Supposed the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project is a success. This implies that if the project is a success, projected sales after expansion will be 17.600 Assume that success and fallure are equally likely Note that abandonment is still an option if the project is a failure a. What is the NPV of the project? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV b. What is the value of the option to expand? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) The value of the option to expand
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 26P
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Transcribed Image Text:We are examining a new project. We expect to sell 8,750 units per year at $189 net cash flow aplece (including CCA) for the next 16
years. In other words, the annual operating cash flow is projected to be $189 * 8,750 = $1,653.750. The relevant discount rate is 14%.
and the initial investment required is $5,500,000. After the first year, the project can be dismantled and sold for $2.800.000. If
expected sales are revised based on the first year's performance. Suppose you think it is likely that expected sales will be revised
upward to 9,500 units if the first year is a success and revised downward to 4,300 units if the first year is not a success. Supposed the
scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expension
would be desirable only if the project is a success. This implies that if the project is a success, projected sales after expansion will be
17.600 Assume that success and fallure are equally likely Note that abandonment is still an option if the project is a failure
a. What is the NPV of the project? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign
in your response.)
NPV
b. What is the value of the option to expand? (Do not round intermediate calculations. Round the final answer to 2 decimal places.
Omit $ sign in your response.)
The value of the option to expand
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