We are examining a new project. We expect to sell 6,600 units per year at $60...

We are examining a new project. We expect to sell 6,600 units per year at $60 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $60 × 6,600 = $396,000. The relevant discount rate is 14 percent, and the initial investment required is $1,770,000. After the first year, the project can be dismantled and sold for $1,640,000. Suppose you think it is likely that expected sales will be revised upward to 9,600 units if the first year is a success and revised downward to 5,200 units if the first year is not a success.

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

b. What is the value of the option to abandon? (Do not round intermediate calculations and round your answer to 2 decimal places. e.g., 32.16.)

Expert Solution

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jeff jeffy answered 1 year ago

We are examining a new project. We expect to sell 6,600 units per year at $60...

We are examining a new project. We expect to sell 6,600 units per year at $60 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $60 × 6,600 = $396,000. The relevant discount rate is 14 percent, and the initial investment required is $1,770,000. 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...

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We are examining a new project. We expect to sell 7,100 units per year at $56 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $56*7,100=$397,600. The relevant discount rate is 14%, and the initial investment required is $1,800,000. Suppose you think it is likely that expected sales will be revised upward to 10,800 units if the first year is a success and revised downward to 3,900 units if...

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We are examining a new project. We expect to sell 6,200 units per year at $76...

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...

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We are examining a new project. We expect to sell 6,600 units per year at $60...

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