We are examining a new project. We expect to sell 6,900 units per year at $63 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $63 × 6,900 = $434,700. The relevant discount rate is 16 percent, and the initial investment required is $1,800,000. After the first year, the project can be dismantled and sold for $1,670,000. Suppose you think it is likely that expected sales will be revised upward to 9,900 units if the first year is a success and revised downward to 5,500 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.) Answer is complete but not entirely correct. a. NPV $ b. Option value 1,378,325.84 5,754.41 ×

We are examining a new project. We expect to sell 6,900 units per year at $63 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $63 × 6,900 = $434,700. The relevant discount rate is 16 percent, and the initial investment required is $1,800,000. After the first year, the project can be dismantled and sold for $1,670,000. Suppose you think it is likely that expected sales will be revised upward to 9,900 units if the first year is a success and revised downward to 5,500 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.) Answer is complete but not entirely correct. a. NPV $ b. Option value 1,378,325.84 5,754.41 ×

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 2PA: Jasmine Manufacturing is considering a project that will require an initial investment of $52,000...

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