We are examining a new project. We expect to sell 6,100 units per year at $75 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $75 x 6,100 $457,500. The relevant discount rate is 18 percent, and the initial investment required is $1,720,000. After the first year, the project can be dismantled and sold for $1,550,000. Suppose you think it is likely that expected sales will be revised upward to 9,100 units if the first year is a success and revised downward to 4,700 units if the first year is not a success. a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (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 abandon? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
We are examining a new project. We expect to sell 6,100 units per year at $75 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $75 x 6,100 $457,500. The relevant discount rate is 18 percent, and the initial investment required is $1,720,000. After the first year, the project can be dismantled and sold for $1,550,000. Suppose you think it is likely that expected sales will be revised upward to 9,100 units if the first year is a success and revised downward to 4,700 units if the first year is not a success. a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (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 abandon? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Financial And Managerial Accounting
15th Edition
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:WARREN, Carl S.
Chapter26: Capital Investment Analysis
Section: Chapter Questions
Problem 3CMA
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![Problem 7-18 Abandonment
We are examining a new project. We expect to sell 6,100 units per year at $75 net cash
flow apiece for the next 10 years. In other words, the annual operating cash flow is
projected to be $75 x 6,100 $457,500. The relevant discount rate is 18 percent, and the
initial investment required is $1,720,000. After the first year, the project can be
dismantled and sold for $1,550,000. Suppose you think it is likely that expected sales will
be revised upward to 9,100 units if the first year is a success and revised downward to
4,700 units if the first year is not a success.
a. If success and failure are equally likely, what is the NPV of the project? Consider the
possibility of abandonment in answering. (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 abandon? (Do not round intermediate calculations
and round your answer to 2 decimal places, e.g., 32.16.)
a. NPV
b. Option value
S
$ 1,312,627.12
935,712.54 X
and incorrect from your](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fde67069b-3545-441b-bdba-8e2fd5cd2576%2Ff7649c2a-33f3-414a-9b1f-a54ff0d79b5a%2F0nt83o_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Problem 7-18 Abandonment
We are examining a new project. We expect to sell 6,100 units per year at $75 net cash
flow apiece for the next 10 years. In other words, the annual operating cash flow is
projected to be $75 x 6,100 $457,500. The relevant discount rate is 18 percent, and the
initial investment required is $1,720,000. After the first year, the project can be
dismantled and sold for $1,550,000. Suppose you think it is likely that expected sales will
be revised upward to 9,100 units if the first year is a success and revised downward to
4,700 units if the first year is not a success.
a. If success and failure are equally likely, what is the NPV of the project? Consider the
possibility of abandonment in answering. (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 abandon? (Do not round intermediate calculations
and round your answer to 2 decimal places, e.g., 32.16.)
a. NPV
b. Option value
S
$ 1,312,627.12
935,712.54 X
and incorrect from your
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