Question
Allied Products, Inc., is considering a new product launch. The firm expects to have annual operating cash flow of $8.1 million for the next 8
Allied Products, Inc., is considering a new product launch. The firm expects to have annual operating cash flow of $8.1 million for the next 8 years. Allied Products uses a discount rate of 12 percent for new product launches. The initial investment is $38.1 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 $25.1 million. If the estimates of remaining cash flows are revised based on the first years experience, at what level of expected cash flows does it make sense to abandon the project? |
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