Question
We are examining a new project. We expect to sell 5,800 units per year at $72 net cash flow apiece for the next 10 years.
We are examining a new project. We expect to sell 5,800 units per year at $72 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $72 5,800 = $417,600. The relevant discount rate is 15 percent, and the initial investment required is $1,690,000. After the first year, the project can be dismantled and sold for $1,520,000. Suppose you think it is likely that expected sales will be revised upward to 8,800 units if the first year is a success and revised downward to 4,400 units if the first year is not a success. a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the option to abandon? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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