We are examining a new project. We expect to sell 5,400 units per year at $68 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $68 × 5,400 = 5367,200. The relevant discount rate is 18 percent, and the initial investment required is $1,530,000. After the first year, the project can be dismantled and sold for $1,250,000. Suppose you think it is likely that expected sales will be revised upward to 8,400 units if the first year is a success and revised downward to 4,000 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.) NPV 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.) Option value %24

We are examining a new project. We expect to sell 5,400 units per year at $68 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $68 × 5,400 = 5367,200. The relevant discount rate is 18 percent, and the initial investment required is $1,530,000. After the first year, the project can be dismantled and sold for $1,250,000. Suppose you think it is likely that expected sales will be revised upward to 8,400 units if the first year is a success and revised downward to 4,000 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.) NPV 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.) Option value %24

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section14.A: Breakeven Analysis

Problem 8P

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