Question

We are examining a new project. We expect to sell 5,400 units per year at $68 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $68 × 5,400 = $367,200. The relevant discount rate is 18 percent, and the initial investment required is $1,530,000.

a.	What is the base-case NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

   

b.

After the first year, the project can be dismantled and sold for $1,250,000. If expected sales are revised based on the first year’s performance, below what level of expected sales would it make sense to abandon the project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

Level of expected sales

units

Answer 1

a. NPV = annual operating cashflow * PVAF(R%, n years) - initial investment = $367,200 * PVAF(18% , 10 years) - $1,530,000 = +$120,228.49

b.  Let level of expected sales would it make sense to abandon the project be 'x' units

therefore sale price * x units * PVAF of second year to tenth year at rate of 18% = present value of sale price of project after first year

{$68 * x * 3.64662867} = $1,250,000 * PVF(18%, 1 year)

247.97 x = $1,059,322.03

x = 4271.96 units

So level of expected sales would it make sense to abandon the project be 'x' units = 4271