# Question: Your company is examining a new project It expects to

Your company is examining a new project. It expects to sell 9,000 units per year at $35 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $35 × 9,000 = $315,000. The relevant discount rate is 16 percent, and the initial investment required is $1,350,000.

a. What is the base-case NPV?

b. After the first year, the project can be dismantled and sold for $950,000. If expected sales are revised based on the first year’s performance, when would it make sense to abandon the investment? In other words, at what level of expected sales would it make sense to abandon the project?

c. Explain how the $950,000 abandonment value can be viewed as the opportunity cost of keeping the project in one year.

a. What is the base-case NPV?

b. After the first year, the project can be dismantled and sold for $950,000. If expected sales are revised based on the first year’s performance, when would it make sense to abandon the investment? In other words, at what level of expected sales would it make sense to abandon the project?

c. Explain how the $950,000 abandonment value can be viewed as the opportunity cost of keeping the project in one year.

**View Solution:**## Answer to relevant Questions

In Problem 9.12, suppose you think it is likely that expected sales will be revised upward to 11,000 units if the first year is a success and revised downward to 4,000 units if the first year is not a success. a. If success ...Consider a project to supply Hamilton with 35,000 tonnes of machine screws annually for automobile production. You will need an initial $2,900,000 investment in threading equipment to get the project started; the project ...Suppose the returns on bonds and T-bills are normally distributed. Based on the historical record, use the NORMDIST function in Microsoft Excel to answer the following questions: a. What is the probability that in any given ...A stock has a beta of 1.13 and an expected return of 12.1 percent. A risk-free asset currently earns 5 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of ...Consider the following information: a. What is the expected return on an equally weighted portfolio of these three stocks? b. What is the variance of a portfolio invested 20 percent each in A and B, and 60 per cent in C?Post your question