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 16 units per year at $304,000 net cash flow per unit for the next four 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 12 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.) Answer for this (a) should be -26,332.78.

b.If unsuccessful, after the first year, the project can be dismantled and will have an aftertax salvage value of $10.9 million. Also, after the first year expected cash flows will be revised up to 21 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

16 16 16 16 Units 304000 304000304000304000 Price 2 0 Year 1480000048640004864000 4864000 4864000 Sales 26332.78 10 2 0 Year 1480000048640006384000 6384000 6384000 Sales 12 3233295.37 NPV 2 0 Year 16 148000004864000 Sales 17 10900000 After tax cash flow 18 14800000 15764000 Sales 19 725000.00 NPV 21 1254147.686 Revised 23

16 16 16 16 Units 304000 304000 Price 4 ear -H2 H3 -G2 G3 -14.8 10A6 Sales -NPV(12%,E6:H6)+D6 10 Year 16 304000 -21 30400021 304000 21 304000 :-14.8 1046 Sales 12 13 -NPV( 12%,E12:H12)+D12 NPV 15 Year -16 304000 -14.8 10 6 Sales 17 -10.9*1046 After tax cash flow -SUM(E17:E18) SUM(F17:F18) SUM(D17:D18) Sales 20 NPV(12%,E19:F19)+D19 NPV -D14* 50%+D21* 5096 Revised 23 24