Question

We are examining a new project. We expect to sell 6,400 units per year at $58 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $58 × 6,400 = $371,200. The relevant discount rate is 12 percent, and the initial investment required is $1,750,000. After the first year, the project can be dismantled and sold for $1,620,000. Suppose you think it is likely that expected sales will be revised upward to 9,400 units if the first year is a success and revised downward to 5,000 units if the first year is not a success. Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project were a success. This implies that if the project is a success, projected sales after expansion will be 18,800. Note that abandonment is an option if the project is a failure.

  

a.	If success and failure are equally likely, what is the NPV of the project? (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 expand? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

Home ert Page Layout Formulas Data Review V Add-Ins 義Cut Σ AutoSum , aCopy Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Paste Sort &Find & Format Painter 袖 2 Clear , Formatting ▼ as Table-styles ▼ Filter Select ▼ ▼ ▼ Clipboard Font Cells dting Alignment CV414 CT DA DE CU CV cw CX CY cZ DB DC 414 415 EXPAND 371200 cash flow for year1 6400 x 58- 416 417 418 if project is success sales can be 419 CFAT EACH YEAR doubled 18800 x 58 1090400 420 421 present value of all CFATs FOR 9 YEARS 1090400 X PVI FA@ 12%, 9YEARS 809923.57 422 1090400 X 5.3282 if project is a failure 423 424 425 present value of all CFATs sale of project 1620000 426 427 so expected value of project at year 1 average of success &failure cashflows + cashflow of the first year (5809923.57+1620000)/2371200 428 4086161.79 429 430 431 NPV-[-1750000+(4086161.79/1.12)] 432 1898358.74 | HIGH LOW TARGET PRICE PB ROPI | ApV ROSS STOCK DIV . NAV HEDGE FUND MF EV PE EPS DIV , ABNORMAL deberk , MARGIN MONEY , marginal tx erences: AL125 04:15 齞"z a 옐 9L.will Qa; ENIG 24-05-2019

Home ert Page Layout Formulas Data Review V Add-Ins s Cut Σ AutoSum , ta copy." Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛 Paste Conditional Format C Insert Delete Format Sort &Find & Format Painter Formatting as Table Styles ClearFilter Select Clipboard Font Cells dting Alignment CV451 DA CT CU CV cw CX CY cZ DB DC 433 434 435 THE GAIN FROM OPTION TO EXPAND PRESENT VALUE OF CASHFLOWS FROM ADDITONAL UNITS SOLD 436 ADDITIONAL UNITS SOLD 18800 -9400 9400 437 438 GAIN FROM EXPAND (9400 X 58) X PVIFA@ 12%, 9YEARS 5.3282 439 GAIN FROM EXPAND 545200 X 2904961.79 440 441 0.5 X 2904961.79/(1+0.12) OPTION TO EXPAND TODAY 442 OPTION VALUE 1296857.94 443 445 446 447 448 449 450 451 | HIGH LOW TARGET PRICE PB ROPI | ApV ROSS STOCK DIV , NAV HEDGE FUND MF , EV PE EPS DIV , ABNORMAL deberk . MARGIN MONEY , marginal tx :4 erences: AL125 04:15 "z 191.will Qa; ENIG 24-05-2019