Prince & King, Inc. is considering a project with a life of 5 years and an initial
Question:
Prince & King, Inc. is considering a project with a life of 5 years and an initial cost of $120,000. The discount rate for the project is 12 percent. The firm expects to sell 2,100 units a year at a net cash flow per unit of $20. The firm will have the option to abandon this project after three years at which time it could sell the project for $50,000.
a. At what level of sales should the firm be willing to abandon this project at the end of the third year?
b. Prince & King, Inc. is interested in knowing how the project will perform if the sales forecasts for Years 4 and 5 of the project are revised such that there is a 50 percent chance the sales will be either 1,400 or 2,500 units a year. The net cash flow per unit each year remains unchanged at $20. Furthermore, the firm still expects to sell 2,100 units a year for each of the first three years and will continue to have the option to abandon this project after three years at which time it could sell the project for $50,000. What is the net present value of this project given these revised sales forecasts?
[Hint: Your answer to part (b) is influenced by your answer to part (a)
Fundamentals of Corporate Finance
ISBN: 978-0078034640
7th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus