Question

We are examining a new project. We expect to sell 8,550 units per year at $177 net cash flow apiece (including CCA) for the next 16 years. In other words, the annual operating cash flow is projected to be $177 × 8,550 = $1,513,350. The relevant discount rate is 13%, and the initial investment required is $5,033,000. Suppose you think it is likely that expected sales will be revised upward to 9,300 units if the first year is a success and revised downward to 4,100 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. Round the final answer to 2 decimal places. Omit $ sign in your response.)

 

NPV           $ 

 

b. After the first year, the project can be dismantled and sold for $2,561,000. What is the value of the option to abandon? (Negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)

 

The value of the option to abandon           $