Problem $7-23$ Abandonment Decisions

Halloween, Incorporated, is considering a new product launch. The firm expects to have an annual operating cash flow of $$10$ million for the next $8$ years. The discount rate for this project is $12$ percent for new product launches. The initial investment is $$40$ million. Assume that the prolect 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 $$27$ 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$.,1,234,567\mathrm{.}89.)$

a$.$ NPV

b$.$ Annual cash flows