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 15 units per year at $300,000 net cash flow per unit for the next five years. The engineering department has come up with the estimate that developing the machine will take a $14.8 million initial investment. The finance department has estimated that a discount rate of 16 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.) = -65,678.56

b.

If unsuccessful, after the first year, the project can be dismantled and will have an aftertax salvage value of $10.5 million. Also, after the first year expected cash flows will be revised up to 20 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

Particular Initial Investment Net cash inflow Period in years) Discount rate Base case 14800000 4500000 23 24 16% 25 26 NPV ($65,678.56)

20 Unsuccessful 14800000 Successful 14800000 4500000 22 4500000 23 Particular Initial investment Firsf year inflow Time remain Discount rate Salvage value after 1 year inflow 24 16% 16% 10500000 25 26 6000000 27 28 NPV ($1,868,965.52) $3,552,658 29 30 31 Revised NPV $841,846.48

Formulas used:-

NPV (Base case)=-PV(C24,C23,C22)-C21

NPV (Unsuccessful) =-PV(C24,1,0,C22+C25)-C21

NPV (Successful) =-(PV(D24,1,0,D22)+(PV(D24,D23,D26))/(1.16))-D21

Revised NPV =(C28*0.5)+(D28*0.5)

I hope my efforts will be fruitful to you