Problem 7-28 Abandonment Decisions Consider the following project for Hand Clapper, Incorporated. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires an initial investment of $15.9 million that will be depreciated straight-line to zero over the project's life. An initial investment in net working capital of $990,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $12.7 million in pretax revenues with $5 million in pretax operating costs. The tax rate is 24 percent and the discount rate is 12 percent. The market value of the equipment over the life of the project is as follows: Year 1 2 3 4 Market Value (in millions) $ 13.90 10.90 8.40 1.75 a. Assuming Hand Clapper operates this project for four years, what is the 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.) b-1. Compute the project NPV assuming the project is abandoned after only one year. (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.) b-2. Compute the project NPV assuming the project is abandoned after only two years. (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.) a. NPV b-1. NPV b-2. NPV b-3. NPV b-3. Compute the project NPV assuming the project is abandoned after only three years. (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.)
Problem 7-28 Abandonment Decisions Consider the following project for Hand Clapper, Incorporated. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires an initial investment of $15.9 million that will be depreciated straight-line to zero over the project's life. An initial investment in net working capital of $990,000 is required to support spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $12.7 million in pretax revenues with $5 million in pretax operating costs. The tax rate is 24 percent and the discount rate is 12 percent. The market value of the equipment over the life of the project is as follows: Year 1 2 3 4 Market Value (in millions) $ 13.90 10.90 8.40 1.75 a. Assuming Hand Clapper operates this project for four years, what is the 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.) b-1. Compute the project NPV assuming the project is abandoned after only one year. (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.) b-2. Compute the project NPV assuming the project is abandoned after only two years. (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.) a. NPV b-1. NPV b-2. NPV b-3. NPV b-3. Compute the project NPV assuming the project is abandoned after only three years. (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.)
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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Transcribed Image Text:Problem 7-28 Abandonment Decisions
Consider the following project for Hand Clapper, Incorporated. The company is
considering a 4-year project to manufacture clap-command garage door openers. This
project requires an initial investment of $15.9 million that will be depreciated straight-line
to zero over the project's life. An initial investment in net working capital of $990,000 is
required to support spare parts inventory; this cost is fully recoverable whenever the
project ends. The company believes it can generate $12.7 million in pretax revenues with
$5 million in pretax operating costs. The tax rate is 24 percent and the discount rate is 12
percent. The market value of the equipment over the life of the project is as follows:
Year
1
2
3
4
Market Value (in
millions)
$ 13.90
10.90
8.40
1.75
a. Assuming Hand Clapper operates this project for four years, what is the 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.)
a. NPV
b-1. NPV
b-2. NPV
b-3. NPV
b-1. Compute the project NPV assuming the project is abandoned after only one year.
(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.)
b-2. Compute the project NPV assuming the project is abandoned after only two years.
(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.)
b-3. Compute the project NPV assuming the project is abandoned after only three years.
(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.)
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