Problem $7-23$ Abandonment Decisions

Halloween, Incorporated, is considering a new product launch. The firm expects to have

an annual operating cash flow of $$9\mathrm{.}7$ million for the next $8$ years. The discount rate for

this project is $14$ percent for new product launches. The initial investment is $$39\mathrm{.}7$ million.

Assume that the project has no salvage value at the end of its economic life.

a$.$ What is the NPV of the new product? $($Do not round intermediate calculations and

enter your answer in dollars, not millions of dollars, rounded to $2$ decimal places,

e$.$g$.,1,234,567\mathrm{.}89.$

b$.$ After the first year, the project can be dismantled and sold for $$26\mathrm{.}7$ 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? $($Do

not round intermediate calculations and enter your answer in dollars, not millions

of dollars, rounded to $2$ decimal places, e$.$g$.,1,234,567\mathrm{.}89.)$