Abandonment Decisions Top Products is considering a new product launch for its products. The firm expects to
Question:
Abandonment Decisions Top Products is considering a new product launch for its products. The firm expects to have annual operating cash flow of €18 million for the next eight years. Top Products uses a discount rate of 14 per cent for new product launches. The initial investment is €75 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 €30 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?
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9780077178239
3rd Edition
Authors: David Hillier, Iain Clacher, Stephen A. Ross