Question

We are examining a new project. We expect to sell 6,900 units per year at $63 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $63 × 6,900 = $434,700. The relevant discount rate is 16 percent, and the initial investment required is $1,800,000. After the first year, the project can be dismantled and sold for $1,670,000. Suppose you think it is likely that expected sales will be revised upward to 9,900 units if the first year is a success and revised downward to 5,500 units if the first year is not a success. A. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) B. What is the value of the option to abandon? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

Answer 1

production in year 1 a 69000 rate per piece - 63 eash flow for year 1 = ARB - 434 700 Production & vale now if project is sucess sales can be doubled to 9900X 2 = 19 000 how cash each year = 19800 X 63 = 12, 47, 400 how present value of the EE At's for 9 years. rate = 166, so Ple = 1247400 0 (16%, 10 years = 124700 X (10710 = 5746202083, if project is failure PU (1689.1) Prisert Valle af all CEAT = sale of Projeld - 16,70,000 expected value of project at year 4 aug. of sucese & failure cashflat cash flow of бирм "35) *pali - first year, 4142001.com Jogell splay how suop NPO = - INITIAL investimend + Expected value of product - 18.00000 + Espected value Ачбук si we "salt. dou Sалар apin6 logue = 177/380 3 иру |

♡ The gain from option to Ezepand of = po af cagh How from additional UniT SOLH normal production = ggoo additional unit shold =9900 gain from esep and = 19900X63) X PU if A@ 16% iger a 623700 X 4.600543 - 2073101.47 option to expand Today probability = 0.5 option value = 0 OS X 28 73 101:47, px PLO 116 option value - 1238405.78