Question

We are examining a new project. We expect to sell 6,200 units per year at $76 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $76 × 6,200 = $471,200. The relevant discount rate is 18 percent, and the initial investment required is $1,730,000.

What is the base-case NPV?

After the first year, the project can be dismantled and sold for $1,600,000. 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?

Answer 1

Initial Investment	$          1,730,000
Projected Annual Cash Flow	$             471,200
($76*6200)
		10 year @ 18%
Year	Amount	PV Factor	Present Value
0	$       (1,730,000)	1	$       (1,730,000)
1 to 10	$             471,200	4.494	$          2,117,573
Net Present Value			$             387,573
Project Sale price after 1 year if dismantled	$        1,600,000
If Sales level is equal to or less than break even then it will make sense to abandon
the project.
	Amount	PV Factor	Present Value
Present Value of Sale price after 1 year	$          1,600,000	0.8475	$          1,356,000
Initial Cost			$       (1,730,000)
Present Value of 1 year Sales at break even		$           (374,000)
Sales Value at Year 1			374000/.8475
Sales Value at Year 1			$             441,298
Quantity at this level			441298/76
Quantity at this level			5,807
So If sales quantity goes down 5807 units then it will be advisable to sell project after
1 year.