Question

wster's is considering a project with a life of 5 years and an initial cost of $120,000. The discount rate for the project The firm expects to sell 2,100 units a year at a net cash flow per unit of $20. The firm will have the option to abandon this project after three years at which time it could sell the project for $50,000. The firm is interested in knowing how the project will perform if the sales forecasts for Years 4 and 5 of the project are revised such that there is a 50 percent chance the sales will be either 1,400 or 2,500 units a year. What is the net present value of this project given these revised sales forecasts (consider the option to abandon in your analysis)? (10 points)

Answer 1

G Calculation of NPV 3 2100 2100 Particulars/Years Sales(in units) Net Cash flow per unit Net cash flow (In Amount) 2100 20 42000 2100 2 0 42000 2100 20 42000 20 Probability of sales 50% of 1400 units+50% of 2500 units 1950 39000 20 42000 42000 Sales in units sales in amount If project is abondened after 3 years If project is done for 5 years 1-1,20,000.00 12 13 14 15 16 Initial Cost Annual Cash flow Net Cash flow PV Factor@12% Present Value -1,20,000 42,000 42,000 92,000 -1,20,000 42,000 42,000 92,000 1.0000 0.8929 0.7972 0.7118 -1,20,000 37,500.00 33,482.14 65,483.78 Initial Cost Annual Cash flow Net Cash flow PV Factor@12% Present Value -1,20,000.00 1.0000 -1,20,000.00 42,000.00 42,000.00 0.8929 37,500.00 42,000.00 42,000.00 0.7972 33,482.14 42,000.00 42,000.00 0.7118 29,894.77 39,000.00 39,000.00 39,000.00 39,000.00 0.6355 0.5674 24,785.2122,129.65 27791.77 NPV=Sum of all cash flows 16465.926 NPV=Sum of all cash flows 27,791.77

F12 -42000+50000 Calculation of NPV 2100 2100 2100 2100 Particulars/Years Sales(in units) 2100 Net Cash flow per unit Net cash flow (In Amount) =C4*C5 =D4*D5 1=E4*E5 =F4F5 =G4*G5 If project is abondened after 3 years - 120000 Initial Cost Annual Cash flow Net Cash flow PV Factor@12% Present Value =SUM(C11:C12) =1/1.124010 =C13*C14 42000 =SUM(D11:012) =1/1.124010 =D13*D14 42000 =SUM(E11:E12) =1/1.12^E10 =E13*E14 -42000+50000 =SUM(F11:F12) =1/1.12^F10 =F13*F14 15 NPV=Sum of all cash flows =SUM(C15:F15)

F12 : -42000+50000 L M N O Probability of sales 50% of 1400 units+50% of 2500 units 5 Sales in units 6 sales in amount =700+1250 =J5*20 If project is done for 5 years - 120000 11 Initial Cost 12 Annual Cash flow 13 Net Cash flow 14 PV Factor@12% 15 Present Value 16 17 NPV=Sum of all cash flows =SUM(J11:J12) =1/1.12^J 10 =J13*J14 42000 =SUM(K11:K12) =1/1.12^K10 =K13*K14 42000 =SUM(L11:L12) =1/1.12-L10 =L13*L14 42000 =SUM(M11:M12) =1/1.12^M10 =M13*M14 =1950*20 =SUM(N11:N12) =1/1.124N10 =N13*N14 =1950*20 =SUM(011:012) =1/1.124010 =013*014 =SUM(J15:015) =SUM(J15:015) Sheet1 Sheet2 +