Jazz town, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9.0 million for the next 9 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $37.5 million. Assume that the project has no salvage value at the end of its economic life. After the first year, the project can be dismantled and sold for $26.1 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?
Jazz town, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9.0 million for the next 9 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $37.5 million. Assume that the project has no salvage value at the end of its economic life. After the first year, the project can be dismantled and sold for $26.1 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Jazz town, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9.0 million for the next 9 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $37.5 million. Assume that the project has no salvage value at the end of its economic life.
After the first year, the project can be dismantled and sold for $26.1 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?
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