Question

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 upward to 8,200 units if the first year is a success and revised downward to 3,800 units if the first year is not a success. Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project is a success. This implies that if the project is a success, projected sales after expansion will be 16,400. Note that abandonment is still an option if the project is a failure.

If success and failure are equally likely, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

  

What is the value of the option to expand? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Option value

$

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut Dr General Wrap Text Merge & Center - Merge & Center m Find & E $ - % $ % 8 ... Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format Σ AutoSum : A Fill 2 Sort & 2 Clear Filter Editing Select Alignment Number Cells Calibri 11 AA = = = E Copy Paste Format Painter BIU- D A E Clipboard Font DA705 - for _ CT CU CV CW 689 EXPAND 690 cash flow for year 1 CX C Y CZ DA DB DC DE 5200 x 66 = 343200 691 692 if project is success CFAT EACH YEAR sales can be doubled to 693 16400 x 66= 1082400 present value of all CFATS FOR 9 YEARS 694 695 696 697 1082400 X PVIFA@ 17%, 9YEARS 1121000 X 4.4506 4817292.90 if project is a failure 698 present value of all CFATS sale of project 1230000 699 700 701 702 703 704 705 706 707 H Rea so expected value of project at year 1 average of success & failure cashflows + cashflow of the first year (4817292.90 + 1230000)/2 + 343200 3366846.45 NPV = -INITIAL INVESTMENT + EXPECTED VALUE OF PROJECT TODAY NPV = [-1510000+(3366846.45/1.17)] 1367646.54 STOCK DIV NAV HEDGE FUND ME EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS HIGH LOW TARGET PRICE ferences: AL125 price quote EVA MVAI BOI 130% 0 + ELEB * 0 ENG 22-11-2019

PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut Σ AutoSum : A Fill 2 Sort & 2 Clear Filter Editing m Find & Select DB DC D Calibri 11 AA = = = Dr Wrap Text General E Copy Paste BIU- D A E Format Painter E Merge & Center - Merge & Center $ - % $ % 8 ... Conditional Format Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells CU718 CT CU CV CW CX CY CZ DA 707 708 b THE GAIN FROM OPTION TO EXPAND = PRESENT VALUE OF CASHFLOWS FROM ADDITONAL UNITS SOLD 710 ADDITIONAL UNITS SOLD = 16400 - 8200 = 8200 711 712 GAIN FROM EXPAND = (8200 X 66 X PVIFA@ 17%, 9YEARS 713 GAIN FROM EXPAND = 541200 X 4.4506 2408646.45 714 715 OPTION TO EXPAND TODAY = 0.5 X 2408646.45/(1+0.17) OPTION VALUE = 1029336.09 709 716 717 718 719 720 721 722 723 724 725 H Rea STOCK DIV NAV HEDGE FUND ME EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS HIGH LOW TARGET PRICE ferences: AL125 price quote EVA MVAI BOI 130% 0 + ELEB * 10 ENG 22-11-2019