Question

We are examining a new project. We expect to sell 8,900 units per year at $195 net cash flow apiece (including CCA) for the next 16 years. In other words, the annual operating cash flow is projected to be $195 × 8,900 = $1,735,500. The relevant discount rate is 12%, and the initial investment required is $5,772,000. Suppose you think it is likely that expected sales will be revised upward to 9,650 units if the first year is a success and revised downward to 4,450 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. Round the final answer to 2 decimal places.

Omit $ sign in your response.) NPV $ ____

b. After the first year, the project can be dismantled and sold for $2,938,000. What is the value of the option to abandon? (Negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) The value of the option to abandon $ _____

Answer #1

We are examining a new project. We expect to sell 5,600 units
per year at $70 net cash flow apiece for the next 10 years. In
other words, the annual cash flow is projected to be $70 × 5,600 =
$392,000. The relevant discount rate is 18 percent, and the initial
investment required is $1,550,000. After the first year, the
project can be dismantled and sold for $1,270,000. Suppose you
think it is likely that expected sales will be revised...

We are examining a new project. We expect to sell 5,600 units
per year at $70 net cash flow apiece for the next 10 years. In
other words, the annual operating cash flow is projected to be $70
× 5,600 = $392,000. The relevant discount rate is 18 percent, and
the initial investment required is $1,550,000. After the first
year, the project can be dismantled and sold for $1,270,000.
Suppose you think it is likely that expected sales will be...

We are examining a new project. We expect to sell 6,900 units
per year at $63 net cash flow apiece for the next 10 years. In
other words, the annual operating cash flow is projected to be $63
× 6,900 = $434,700. The relevant discount rate is 16 percent, and
the initial investment required is $1,800,000. After the first
year, the project can be dismantled and sold for $1,670,000.
Suppose you think it is likely that expected sales will be...

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 operating cash flow is projected to be $75
× 6,100 = $457,500. The relevant discount rate is 18 percent, and
the initial investment required is $1,720,000. After the first
year, the project can be dismantled and sold for $1,550,000.
Suppose you think it is likely that expected sales will be...

We are examining a new project. We expect to sell 5,200 units
per year at $66 net cash flow apiece for the next 10 years. In
other words, the annual cash flow is projected to be $66 × 5,200 =
$343,200. The relevant discount rate is 17 percent, and the initial
investment required is $1,510,000. After the first year, the
project can be dismantled and sold for $1,230,000. Suppose you
think it is likely that expected sales will be revised...

We are examining a new project. We expect to sell 5,600 units
per year at $70 net cash flow apiece for the next 10 years. In
other words, the annual operating cash flow is projected to be $70
× 5,600 = $392,000. The relevant discount rate is 18 percent, and
the initial investment required is $1,550,000. After the first
year, the project can be dismantled and sold for $1,270,000.
Suppose you think it is likely that expected sales will be...

We are examining a new project. We expect to sell 6,200 units
per year at $76 net cash flow apiece for the next 10 years. In
other words, the annual cash flow is projected to be $76 × 6,200 =
$471,200. The relevant discount rate is 18 percent, and the initial
investment required is $1,730,000. After the first year, the
project can be dismantled and sold for $1,600,000. Suppose you
think it is likely that expected sales will be revised...

We are examining a new project. We expect to sell 5,000 units
per year at $64 net cash flow apiece for the next 10 years. In
other words, the annual cash flow is projected to be $64 × 5,000 =
$320,000. The relevant discount rate is 13 percent, and the initial
investment required is $1,610,000. After the first year, the
project can be dismantled and sold for $1,210,000. Suppose you
think it is likely that expected sales will be revised...

We are examining a new project. We expect to sell 6,400 units
per year at $58 net cash flow apiece for the next 10 years. In
other words, the annual operating cash flow is projected to be $58
× 6,400 = $371,200. The relevant discount rate is 12 percent, and
the initial investment required is $1,750,000. a. What is the
base-case NPV? (Do not round intermediate calculations and round
your answer to 2 decimal places, e.g., 32.16.) b. After the...

Liberty Products, Inc., is considering a new product launch. The
firm expects to have annual free cash flow of $5.3 million for the
next eight years. The company uses a discount rate of 11% for new
product launches. The initial investment is $23 million. Assume
that the project has no salvage value at the end of its economic
life. After the first year, the project can be dismantled and sold
for $18 million after taxes.
a. Ignoring the option to...

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