Question
Brewsters is considering a project with a 5-year life and an initial cost of $120,000. The discount rate for the project is 12 percent. The
Brewsters is considering a project with a 5-year life and an initial cost of $120,000. The discount rate for the project is 12 percent. The firm expects to sell 2,100 units a year at a net cash flow per unit of $20. The firm will have the option to abandon this project after three years at which time it could sell the project for $50,000. The firm is interested in knowing how the project will perform if the sales forecasts for Years 4 and 5 of the project are revised such that there is a 50 percent chance the sales will be either 1,400 or 2,500 units a year. What is the net present value of this project given these revised sales forecasts?
A. $23,617
B. $23,719
C. $25,002
D. $26,877
E. $28,745 (This is the correct answer stated. How to you find this NPV?)
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