Question

Allied Products, Inc., is considering a new product launch. The firm expects to have annual operating cash flow of $8.3 million for the next eight years. Allied Products uses a discount rate of 13 percent for new product launches. The initial investment is $38.3 million. Assume that the project has no salvage value at the end of its economic life.

What is the NPV of the new product? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

After the first year, the project can be dismantled and sold for $25.3 million. If the estimates of remaining cash flows are revised based on the first year’s experience, calculate the equivalent annual cash flows the project must earn to equal the aftertax salvage value. Assume the salvage value given is an aftertax value. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Cash Flows

0= - $38.3 Millions

1-8 = $ 8.3 Millions

Discount Rate = 13%

After Discounting Present Value of Cash Flows = 39,829,793.44

Net Present Value = OutFlows - Present Value of Cash Flows

= $ 1,529,793.44

b) Salvage Value of Cash Flows at the end of Year 1 = $ 25.3 Million

Cummulative Discounting Factor @ 13% for 7 Years 1-7 = 4.422610432

Cash Flows Required every year to be equal to Salvage Value at the end of year 1 = Salvage Value/Cummulative dicounting Factor

= $5,720,603.34