3M is evaluating a new type of adhesive. The initial investment required is $1,134 million. The company expects to sell 70 million units every year forever, at a net cash flow of $2.83 per unit.

Investments with similar risk deliver a rate of return of 18%.

Attempt 1/10 for 10 pts.

Part 1

What is the NPV of the project (in $ million)?

Correct

Annual cash flows: C = Q * NCF = 70 * 2.83 = 198.1

Since the annual cash flows are constant and occur forever, we can use the perpetuity formula to find their present value:

NPV = -1,134 + 198.1/0.18 = -33.44 (million)

The NPV is negative, making the project unattractive.

Attempt 2/10 for 8 pts.

Part 2

In fact, there is a 50% chance that annual sales will hit 105 million units and a 50% chance that they will be 35 million units. The project assets can be sold for $907 million (after taxes) in year 1. What is the expected NPV of the project if the company can abandon or expand the project after one year (in $ million)?