Abandonment Decisions Allied Products is considering a new product launch. The firm expects to have an annual
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Abandonment Decisions Allied Products is considering a new product launch. The firm expects to have an annual operating cash flow of AED60 million for the next six years. Allied Products uses a discount rate of 14 per cent for new product launches. The initial investment is AED200 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?
(b) After the first year, the project can be dismantled and sold for AED50 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?
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