We are examining a new project. We expect to sell 6, 100 units per year at $75 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $75\ times 6,100 = $457,500. The relevant discount rate is 18 percent, and the initial investment required is $1,720, 000.

We are examining a new project. We expect to sell 6, 100 units per year at $75 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $75\ times 6,100 = $457,500. The relevant discount rate is 18 percent, and the initial investment required is $1,720, 000.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 1P: A project has an initial cost of 40,000, expected net cash inflows of 9,000 per year for 7 years,...

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We are examining a new project. We expect to sell 6,000 units per year at $74 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $74 × 6,000 = $444,000. The relevant discount rate is 18 percent, and the initial investment required is $1,710,000. After the first year, the project can be dismantled and sold for $1,540,000. Suppose you think it is likely that expected sales will be revised upward to 9,000 units if the first year is a success and revised downward to 4,600 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.)