page) Cost of Project Number of Years Cost of Capital CF each Year Option 1 NPV Option 2 CF if revised upward CF if Revised downward Number of years left PV of upward revision of CF PV of down ward revision of CF Scrap value CF at date 1 = PV of Expected Future CF's +CF at Date 1 PV of CF at date 0 NPV at Date 0 for option 2 ACCEPT OF REJECT the Project 5 points Dalvi wants to undertake a project that costs $10,000 and shall generate CP's of $1500 each year for the next 9 years. If the cost of capital is 7% find the NPV. Dalvi wants to incorporate an option to abandon and commissions a study to estimate future Cash Flows. He finds that from year 2 the CF's can go up to $2000 each year for the remaining years of the project with a probability of 7/10 or go down to $1100 for the remaining project years. Dalvi can also abandon the project and sell it for scrap for $1000. What is the new NPV assuming that the cost of capital changes to 9%? Formulas ATSV - Market Value - Tax Rate (Market Value -- Book Value) CFA = OCF-CHANGE IN NWC-NCS R=r, +B(R. -r) D. (1+g) P = R-g WACC =W.R, + WpRs+W,R (1-1) V=D+E+PS D Price = R-8 FC+OCF Break Even Price VC We -E/V; Wps - PS/V; Wp - D/V; WAFTC =W FTC, + W, FTC, +W,FTC, Initial Cost = Amount Raised (1-Flotation Costs)