Question

Herjavec Enterprises is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that the company can sell 16 units per year at $301,000 net cash flow per unit for the next four years. The engineering department has come up with the estimate that developing the machine will take a $14.4 million initial investment. The finance department has estimated that a discount rate of 13 percent should be used.

a.	What is the base-case NPV? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

b.

If unsuccessful, after the first year, the project can be dismantled and will have an aftertax salvage value of $10.6 million. Also, after the first year expected cash flows will be revised up to 21 units per year or down to 0 units with equal probability. What is the revised NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.

Answer 1

a)	Base case NPV
	PV of cash inflow		$14,325,053.90	PV(13%,4,16*301000,,)
	Less: initial investment		$14,400,000.00
	NPV		($74,946.10)
b)	Cash Flow
	Year	Successful	Unsuccessful
	0	($14,400,000.00)	($14,400,000.00)
	1	$4,816,000.00	$15,416,000.00
	2	$6,321,000.00	0
	3	$6,321,000.00	0
	4	$6,321,000.00	0
	NPV @ 13%	$3,069,774.84	($757,522.12)
	Probability	0.5	0.5
	Net NPV	$1,156,126.36