Question

We are examining a new project. We expect to sell 6,700 units per year at $61 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $61 × 6,700 = $408,700. The relevant discount rate is 15 percent and the initial investment required is $1,780,000.

a. What is the base-case NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b. After the first year, the project can be dismantled and sold for $1,650,000. If expected sales are revised based on the first year’s performance, below what level of expected sales would it make sense to abandon the project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Answer 1

a]

NPV is calculated using NPV function in Excel

NPV is $217,170.74

b]

If the project can be dismantled and sold for $1,650,000, then it would make sense to abandon the project if present value of remaining 9 years cash flows is less than $1,650,000.

The present value of remaining 9 years cash flows at the current level of cash flow per unit is $1,950,146.35.

We use goal seek function in Excel to find the level of cash flow per unit at which present value of remaining 9 years cash flows is $1,650,000.

The level of cash flow per unit at which present value of remaining year's cash flows equals $1,650,000 is $345,797 per unit.

If the sales are below  $345,797 per unit, it would make sense to abandon the project