Chapter 7, Problem 17QAP

A

Summary Introduction

Adequate information:

The company expects to sell s $6,500$ units per year at $\$43$ per unit for $10$ years.

Annual operating cash flow is $\$279,500$ .

The discount rate is $16\%$ .

The initial investment required is $\$980,000$ .

To compute: Base-case NPV

Introduction: The current value of a future stream of payments from a business, project, or investment is determined using net present value, or NPV.

B

Summary Introduction

Adequate information:

After the first year, the project can be sold at $\$810,000$ .

Future cash flows are equal to the first year’s cash flow.

The company will take this action only when the present value of future cash flows is equal to $\$810,000$ or more than that.

To compute: At what level of expected sales can the company abandon the project

Introduction: The liquidation value of an asset is another name for abandonment value. The general criteria for choosing whether to cease a product is that the project is abandoned whenever the salvage value of the product exceeds the net present value (NPV) of its anticipated cash flows.

C

Summary Introduction

Adequate information:

  $\$810,000$ is the abandonment value.

To compute: How the abandonment value can be viewed as the opportunity cost of keeping the project in one year.

Introduction: A project's abandonment value is its comparable monetary value if it were to be liquidated right away after paying off all outstanding debts. The value of what you give up when choosing between two or more options is known as opportunity cost.