Applied Nanotech is thinking about introducing a new surface cleaning machine. The marketing department has come up

Question:

Applied Nanotech is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that Applied Nanotech can sell 15 units per year at $275,000 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 $16 million initial investment. The finance department has estimated that a discount rate of 11 percent should be used.

a. What is the base-case NPV?

b. If unsuccessful, after the first year the project can be dismantled and will have an after tax salvage value of $11 million. Also, after the first year, expected cash flows will be revised up to 20 units per year or to 0 units, with equal probability. What is the revised NPV?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...