ABC Inc. (ABC) is a manufacturer and distributor of camping and hiking equipment in the U.S. ABC management is considering a new division to manufacture outdoor patio products to be sold in the same retail outlets as ABC's existing products. Juan is a consultant hired by ABC to explore the feasibility/profitability of the new division. Juan begins by developing future financial projections for the division based on comparable firms that produce similar products (see Exhibit 1). The net present value (NPV) of the project should be calculated assuming that the whole new division will be sold for $20 million (after taxes) at the end of year 5. Notice that no depreciation expenses (tax shields) will be possible after selling the division and all working capital can be recaptured. The cost of capital is assumed to be 15% and tax rate 32% Exhibit 1-ABC Outdoor Patio Product Division Abridged Income Statement Year-End Projections Note: All values are in USD millions. 0 1 2 3 4 5 10.36 2.20 2.70 3.24 3.89 4.67 5.60 End of Year Capital investment required Increase in net working capital Sales Variable expenses Fixed expenses Depreciation EBIT 1.62 1.94 2.33 2.80 3.36 0.20 0.20 0.20 0.20 0.20 0.21 0.21 0.21 0.21 0.21 0.88 1.44 0.67 0.36 1.14 0.36 1.81 0.36 0.36 0.36 Interest Taxable income Tax expense (32%) Net income 0.31 0.10 0.52 0.17 0.78 0.25 1.08 0.34 1.45 0.46 0.21 0.35 0.53 0.74 0.99 Estimate the NPV of the project and answer the following questions: 1. What is the present value of the cash flows for period 2 ? Select A, B or C 2. What is the NPV of the project? Select D, E or F 3. Suppose now that there is a 50% probability that sales are as estimated in Exhibit 1 and a 50% probability that they are only 40% of what is estimated in Exhibit 1. In this case variable cost will be also only 40% of what is estimated in Exhibit 1. What is the expected NPV under this scenario? Select G, H or I 4. Now assume that at the end of the year 1 the company will be able to know if they are in the good or bad sales scenario. If they have bad sales (i.e. only 40% of Exhibit 1) they can take the option to abandon the project. In this case they can sale the division in 9 million at the end of year 1 and recoup all the networking capital. What is the Expected NPV with this option to abandon? Select J, K or L 5. What is the value of the option to abandon? select M, N, or O ABC Inc. (ABC) is a manufacturer and distributor of camping and hiking equipment in the U.S. ABC management is considering a new division to manufacture outdoor patio products to be sold in the same retail outlets as ABC's existing products. Juan is a consultant hired by ABC to explore the feasibility/profitability of the new division. Juan begins by developing future financial projections for the division based on comparable firms that produce similar products (see Exhibit 1). The net present value (NPV) of the project should be calculated assuming that the whole new division will be sold for $20 million (after taxes) at the end of year 5. Notice that no depreciation expenses (tax shields) will be possible after selling the division and all working capital can be recaptured. The cost of capital is assumed to be 15% and tax rate 32% Exhibit 1-ABC Outdoor Patio Product Division Abridged Income Statement Year-End Projections Note: All values are in USD millions. 0 1 2 3 4 5 10.36 2.20 2.70 3.24 3.89 4.67 5.60 End of Year Capital investment required Increase in net working capital Sales Variable expenses Fixed expenses Depreciation EBIT 1.62 1.94 2.33 2.80 3.36 0.20 0.20 0.20 0.20 0.20 0.21 0.21 0.21 0.21 0.21 0.88 1.44 0.67 0.36 1.14 0.36 1.81 0.36 0.36 0.36 Interest Taxable income Tax expense (32%) Net income 0.31 0.10 0.52 0.17 0.78 0.25 1.08 0.34 1.45 0.46 0.21 0.35 0.53 0.74 0.99 Estimate the NPV of the project and answer the following questions: 1. What is the present value of the cash flows for period 2 ? Select A, B or C 2. What is the NPV of the project? Select D, E or F 3. Suppose now that there is a 50% probability that sales are as estimated in Exhibit 1 and a 50% probability that they are only 40% of what is estimated in Exhibit 1. In this case variable cost will be also only 40% of what is estimated in Exhibit 1. What is the expected NPV under this scenario? Select G, H or I 4. Now assume that at the end of the year 1 the company will be able to know if they are in the good or bad sales scenario. If they have bad sales (i.e. only 40% of Exhibit 1) they can take the option to abandon the project. In this case they can sale the division in 9 million at the end of year 1 and recoup all the networking capital. What is the Expected NPV with this option to abandon? Select J, K or L 5. What is the value of the option to abandon? select M, N, or O