Question

Herjavec Enterprises is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that the company can sell 14 units per year at $299,000 net cash flow per unit for the next five years. The engineering department has come up with the estimate that developing the machine will take a $14.1 million initial investment. The finance department has estimated that a discount rate of 15 percent should be used. a. What is the base-case NPV? (A negative answer should be indicated by a minus sign. 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. If unsuccessful, after the first year, the project can be dismantled and will have an aftertax salvage value of $10.4 million. Also, after the first year expected cash flows will be revised up to 19 units per year or down to 0 units with equal probability. What is the revised NPV? (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.)

Answer 1

		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate=15%=0.15
		N=Year of Cash Flow
		Net CashFlow per year	$4,186,000	(14*299000)
	N	Year	0	1	2	3	4	5
	A	Initial CashFlow	($14,100,000)
	B	Net Annual CashFlow		$4,186,000	$4,186,000	$4,186,000	$4,186,000	$4,186,000
	C=A+B	Total Cash Flow	($14,100,000)	$4,186,000	$4,186,000	$4,186,000	$4,186,000	$4,186,000	SUM
	PV=C/(1.15^N)	Present Value (PV) of Cash Flow:	($14,100,000)	$3,640,000.00	$3,165,217.39	$2,752,362.95	$2,393,359.09	$2,081,181.81	($67,878.76)
	NPV=Sum of PV	Base Case NPV	($67,878.76)
		CASH FLOW IF UNSUCCESSFUL
		(Probability 50%)
	N	Year	0	1
	C	Total Cash Flow	($14,100,000)	$10,400,000	SUM
	PV=C/(1.15^N)	Present Value (PV) of Cash Flow:	($14,100,000)	$9,043,478.26	($5,056,522)
		Net Present Value(NPV)	($5,056,522)
		CASH FLOW IF SUCCESSFUL
		(Probability 50%)
		Annual Cash flow	$5,681,000	(19*299000)
	N	Year	0	1	2	3	4	5
	C	Total Cash Flow	($14,100,000)	$5,681,000	$5,681,000	$5,681,000	$5,681,000	$5,681,000	SUM
	PV=C/(1.15^N)	Present Value (PV) of Cash Flow:	($14,100,000)	$4,940,000.00	$4,295,652.17	$3,735,349.72	$3,248,130.19	$2,824,461.03	$4,943,593
		Net Present Value(NPV)	$4,943,593
		Probability	NPV	Probability*NPV
		0.5	($5,056,522)	($2,528,260.87)
		0.5	$4,943,593	$2,471,796.56
			SUM	($56,464.31)
		Expected NPV	($56,464.31)
		Revised NPV	($56,464.31)