Intro

3M is evaluating a new type of adhesive. The initial investment required is $1,433 million. The company expects to sell 59 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 12%.

Attempt 1/10 for 10 pts.

Part 1

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

Correct

Annual cash flows: C = Q * NCF = 59 * 2.83 = 166.97

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

NPV = -1,433 + 166.97/0.12 = -41.58 (million)

The NPV is negative, making the project unattractive.

Attempt 1/10 for 10 pts.

Part 2 (WHERE I NEED HELP)

In fact, there is a 50% chance that annual sales will hit 88.5 million units and a 50% chance that they will be 29.5 million units. The project assets can be sold for $1,146 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)?