Question
Hit or Miss Sports is introducing a new product this year. It is a see at night soccer ball. If the balls are a hit,
Hit or Miss Sports is introducing a new product this year. It is a see at night soccer ball. If the balls are a hit, the firm expects to be able to sell each year 150,000 balls at a price of 40$ each. If the new product is a bust, only 50,000 units can be sold at a price of $30. The variable cost of each ball is $20 and fixed costs are 400,000 a year. The cost of the manufacturing equipment is $6 million and the project life is estimated at 10 years. The firm will use straight-line depreciation. The firms tax rate is 25% and the discount rate is 16% A) If each outcome is equally likely what is the expected NPV? (draw the option tree) [5] B) Now if the firm can abandon the project after 1 year if the sales are weak and sell of the remaining manufacturing equipment for 4 million, would this change the decision? [5] (draw the option tree)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started