Chapter 24, Problem 14QP

a)

Summary Introduction

To find: The base-case net present value.

Introduction:

The variation between the present value of the cash outflows and the present value of the cash inflows is the net present value. In capital budgeting, the net present value is utilized to evaluate the profitability of a project or an investment.

b)

Summary Introduction

To find: The level of expected sales that makes sense to abandon the project.

Introduction:

The projection of sales is the sum of revenue that a firm expects to earn at some point in future is the expected sales.

c)

Summary Introduction

To determine: How the abandonment value of $1,400,000 can be viewed as an opportunity cost of keeping the project for a year.

Introduction:

The cash value or the equivalent value that are associated with an asset is the abandonment value and it is also known as the liquidation value. The abandonment value is significant for a firm at the time of analyzing the profitability of a specific project or asset and taking decisions on whether it has to be maintained or abandoned.