We are examining a new project. We expect to sell 6,000 units per year at $74...

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We are examining a new project. We expect to sell 6,000 unitsper year at $74 net cash flow apiece for the next 10 years. Inother words, the annual cash flow is projected to be $74 × 6,000 =$444,000. The relevant discount rate is 18 percent, and the initialinvestment required is $1,710,000. After the first year, theproject can be dismantled and sold for $1,540,000. Suppose youthink it is likely that expected sales will be revised upward to9,000 units if the first year is a success and revised downward to4,600 units if the first year is not a success.

a.
If success and failure are equally likely, what is the NPV ofthe project? Consider the possibility of abandonment in answering.(Do not round intermediate calculations and round youranswer to 2 decimal places. e.g., 32.16.)
b. What is the value of the option to abandon? (Do notround intermediate calculations and round your answer to 2 decimalplaces. e.g., 32.16.)

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4.3 Ratings (784 Votes)

a NPV Initial Investment 05 x PV of Cash Inflows success 05 x PV of Cash Inflows failure 1710000 05 x 74 x 9000 x 1 11810 018 05 x 74 x 4600 x 1 See Answer

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Transcribed Image Text

We are examining a new project. We expect to sell 6,000 unitsper year at $74 net cash flow apiece for the next 10 years. Inother words, the annual cash flow is projected to be $74 × 6,000 =$444,000. The relevant discount rate is 18 percent, and the initialinvestment required is $1,710,000. After the first year, theproject can be dismantled and sold for $1,540,000. Suppose youthink it is likely that expected sales will be revised upward to9,000 units if the first year is a success and revised downward to4,600 units if the first year is not a success. a.If success and failure are equally likely, what is the NPV ofthe project? Consider the possibility of abandonment in answering.(Do not round intermediate calculations and round youranswer to 2 decimal places. e.g., 32.16.)b.What is the value of the option to abandon? (Do notround intermediate calculations and round your answer to 2 decimalplaces. e.g., 32.16.)

a.	If success and failure are equally likely, what is the NPV ofthe project? Consider the possibility of abandonment in answering.(Do not round intermediate calculations and round youranswer to 2 decimal places. e.g., 32.16.)
b.	What is the value of the option to abandon? (Do notround intermediate calculations and round your answer to 2 decimalplaces. e.g., 32.16.)