a)
To find: The base-case
Introduction:
The variation between the present value of the
b)
To find: The level of expected sales that makes sense to abandon the project.
Introduction:
The projection of sales is the sum of revenue that a firm expects to earn at some point in future is the expected sales.
c)
To determine: How the abandonment value of $1,400,000 can be viewed as an
Introduction:
The cash value or the equivalent value that are associated with an asset is the abandonment value and it is also known as the liquidation value. The abandonment value is significant for a firm at the time of analyzing the profitability of a specific project or asset and taking decisions on whether it has to be maintained or abandoned.
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- A3 8aiv You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation. a. Calculate the following six numbers for this project. Round your answers to two decimal places. (iv) Discounted payback period (in years)arrow_forward#11 NPV A proposed nuclear power plant will cost 2.2 to build and then will produce cash flow of 3 million per year for 15 years. After that period (in 15 years) it must be decommissioned at a cost of 900 million. What is the project NPV if the discount rate is 5%? What is the discount rate at 18%?arrow_forward3. Abandonment options Shan Co. is considering a four-year project that will require an initial investment of $5,000. The base-case cash flows for this project are projected to be $15,000 per year. The best-case cash flows are projected to be $22,000 per year, and the worst-case cash flows are projected to be –$1,500 per year. The company’s analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a 25% probability of the project generating the best-case cash flows and a 25% probability of the project generating the worst-case cash flows. What would be the expected net present value (NPV) of this project if the project’s cost of capital is 12%? $33,347 $36,682 $40,016 $28,345 Shan now wants to take into account its ability to abandon the project at the end of year 2 if the project ends up generating the worst-case scenario cash flows. If it decides to…arrow_forward
- 2 Net Present Value (NPV) Example 1 (Ross et al., 2023, pp. 299-300): We want to establish a new fertilizer business. The project costs $30,000 to launch. The project can generate cash revenues of $20,000 per year. The project will incur cash costs (including taxes) of $14,000 per year. The project will be terminated in 8 years and the project's assets can be sold for $2,000 at that time. A 15% discount rate is appropriate for this project. a. Should we undertake this project? b. If there are 1,000 shares of stock outstanding, what will be the effect on the price per share from taking the project?arrow_forward5. Flexibility options Stay Swift Corp. is looking at investing in a production facility that will require an initial investment of $500,000. The facility will have a three-year useful life, and it will not have any salvage value at the end of the project’s life. If demand is strong, the facility will be able to generate annual cash flows of $255,000, but if demand turns out to be weak, the facility will generate annual cash flows of only $135,000. Stay Swift Corp. thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. If the company uses a project cost of capital of 13%, what will be the expected net present value (NPV) of this project? -$37,596 -$39,575 -$29,681 -$19,788 Stay Swift Corp. could spend $510,000 to build the facility. Spending the additional $10,000 on the facility will allow the company to switch the products they produce in the facility after the first year of operations if demand…arrow_forwardA3 8av You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation. a. Calculate the following six numbers for this project. Round your answers to two decimal places. (v) Internal Rate of Return (IRR in %)arrow_forward
- engineering economy (multiple choice) 3.) Consider a project which involves the investment of P100,000.00 now and P100,000 at the end of one year. Revenues of P150,000 will be generated at the end of years 1 and 2. What is the net present value of this project if the annual interest rate is 10%? a.) P69,421.50 b.) P67,421.50 c.) P68,421.50 d.) P65,421.50arrow_forwardA3 8avi You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 100 units per year, price per unit will be $19,000, variable cost per unit will be $14,000, and fixed costs will be $150,000 per year. The required return on the project is 15%, and the relevant tax rate is 35%. Ignore the half-year rule for accounting for depreciation. a. Calculate the following six numbers for this project. Round your answers to two decimal places. (vi) Average Accounting Return (AAR in %) Hint: Net Income = {[(Price – variable cost)*Quantity Sold] – Fixed Costs – Depreciation} * (1 – Tax rate)arrow_forwardNPV/IRR. A new computer system will require an initial outlay of $20,000, but it will increasethe firm’s cash flows by $4,000 a year for each of the next 8 years. (LO8-1)a. Is the system worth installing if the required rate of return is 9%?b. What if the required return is 14%?arrow_forward
- 3. A project requires an initial investment of $8000. It is expected to generate $1000 at the end of year 1, $2000 at the end of year 2, $3000 at the end of year 3, and $4000 at the end of year 4, which is when the project will terminate. At what required rate of return will you accept the project?arrow_forwardQ11. Schneeberger, Inc. is considering investing in one of two alternatives for increasing the acceleration of its linear motor actuators. The first, alternative X, requires an initial investment of $165,000 and its cash flows exhibit an annual rate of return of i*x = 25%. The second, alternative Y, requires an initial investment of $150,000 and its cash flows have an annual rate of return of i*Y = 15%. Schneeberger’s MARR is 20% per year. Answer the following questions; (a) Will the rate of return on the incremental investment in X be larger or smaller than i*X? (b) What is the expected i*X-Y? The rate of return on the increment is (Click to select) greater than less than 25% per year. The expected i*X-Y is %.arrow_forward40. A firm that applies a 20% MARR on its investments is considering one of two 7-year engineering projects. Project 1 requires an initial investment of P4M, would generate an annual income of P2M, and would entail an annual cost of P0.4M. Project 2 requires P7M, would generate an annual income of P3.7M for the first three years and P3M for the remaining four years, this project would incur annual disbursements of P0.8M. Indicate the better alternative using the incremental investment approach. (Ans. Project 2 is better; i2-1=29.17%)arrow_forward