Question

Johnson, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9 million for the next 8 years. The discount rate for this project is 14 percent for new product launches. The initial investment is $39 million. Assume that the project has no salvage value at the end of its economic life.

  

a.	What is the NPV of the new product? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

b.	After the first year, the project can be dismantled and sold for $26 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?

Answer 1

Attaching the calculations and formulas used :-

a.

b.

If the Project is sold for $26 million after end of first year, NPV of the Project

As shown in Part A, we arrived at NPV of 2.75mn in the following manner:-

We will use "Goal seek" function to arrive at the revised cash flow estimate, which make the NPV equal to negative 8.30 million in the following manner :-

Hence, revised cash flow estimates = $6.61 million