Question
PART A: Halloween, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9.0 million for the
PART A:
Halloween, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9.0 million for the next 9 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $37.5 million. Assume that the project has no salvage value at the end of its economic life.
What is the NPV of the new product?
PART B:
Halloween, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9.0 million for the next 9 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $37.5 million. Assume that the project has no salvage value at the end of its economic life.
After the first year, the project can be dismantled and sold for $26.1 million. If the estimates of remaining cash flows are revised based on the first year's experience, at what level of expected cash flows does it make sense to abandon the project?
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