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We are examining a new project. We expect to sell 5,200 units per year at $66...

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Finance

We are examining a new project. We expect to sell 5,200 unitsper year at $66 net cash flow apiece for the next 10 years. Inother words, the annual operating cash flow is projected to be $66× 5,200 = $343,200. The relevant discount rate is 17 percent, andthe initial investment required is $1,510,000. After the firstyear, the project can be dismantled and sold for $1,230,000.Suppose you think it is likely that expected sales will be revisedupward to 8,200 units if the first year is a success and reviseddownward to 3,800 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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