a) Harrison Corporation expects to sell 8,500 units per year of its new product at $68 net cash flow a piece for the next 10 years. The relevant discount rate is 14 percent, and the initial investment required is $2,300,000. i) Compute the Net Present Value (NPV) of the new product. ii) After the first year, the project can be dismantled and sold for $1,500,000. Calculate the lowest sale quantity level below which it would make sense to abandon the project. iii) Explain how the $1,500,000 abandonment value can be viewed as the opportunity cost of keeping the project in one year.
a) Harrison Corporation expects to sell 8,500 units per year of its new product at $68 net cash flow a piece for the next 10 years. The relevant discount rate is 14 percent, and the initial investment required is $2,300,000. i) Compute the Net Present Value (NPV) of the new product. ii) After the first year, the project can be dismantled and sold for $1,500,000. Calculate the lowest sale quantity level below which it would make sense to abandon the project. iii) Explain how the $1,500,000 abandonment value can be viewed as the opportunity cost of keeping the project in one year.
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 10E: Roberts Company is considering an investment in equipment that is capable of producing more...
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