![Problem 24-14 Abandonment Value (LO5] We are examining a new project. We expect to sell 5,400 units per year at $68 net cash](http://img.homeworklib.com/questions/0ebdb2f0-747f-11ea-a0cf-efd45c6b8fa4.png?x-oss-process=image/resize,w_560)
Homework Answers
| a | ||
| Cashflow table | ||
| Year | 0 | 1-10 |
| Investment | (1,530,000.0000) | |
| Annual cashflows | 367,200.0000 | |
| Cashfows | (1,530,000.0000) | 367,200.0000 |
|
PV factor @ 18%----> PV factor for year 0 ---> 1/(1+18%)^0 PV factor for year 1-10 annuity ---> (1-(1+18%)^-10/18%) |
1.0000 | 4.4941 |
| PV of cashflows | (1,530,000.0000) | 1,650,228.4875 |
| NPV (rounded to two decimals) | 120,228.49 |
| b | ||
| Cashflow table - abandoning the asset | ||
| Year | 0 | 1 |
| Investment | (1,530,000.0000) | |
| Annual cashflows | 367,200.0000 | |
| Salvage value | 1,250,000.0000 | |
| Cashfows | (1,530,000.0000) | 1,617,200.0000 |
|
PV factor @ 18%----> PV factor for year 0 ---> 1/(1+18%)^0 PV factor for year 1-10 annuity ---> (1-(1+18%)^-10/18%) |
1.0000 | 0.8475 |
| PV of cashflows | (1,530,000.0000) | 1,370,508.4746 |
| NPV (rounded to two decimals) | (159,491.53) | |
| Lets take"x" as the sales value to get NPV of -159,491.53 | ||
| Cashflow table - revised sales | ||
| Year | 0 | 1-10 |
| Investment | (1,530,000.0000) | |
| Annual cashflows | 68x | |
| Cashfows | (1,530,000.0000) | 68x |
|
PV factor @ 18%----> PV factor for year 0 ---> 1/(1+18%)^0 PV factor for year 1-10 annuity ---> (1-(1+18%)^-10/18%) |
1.0000 | 4.4941 |
| PV of cashflows | (1,530,000.0000) | 68x*4.4941 |
| NPV (rounded to two decimals) | 305.5988x-1530000 | |
| 305.5988x-$1530000 = $-159491.53 | ||
| Required sales level (in units) | 4,484.67 | |
| Hence, below a sales level of 4484.67 units, it would be better to abandon the project as it would lead to negative NPV greater than ($159491.53) |
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Problem 24-14 Abandonment Value (LO5] We are examining a new project. We expect to sell 5,400...
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