Question: Electrolux is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that Electrolux can sell 10 units

Electrolux is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that Electrolux can sell 10 units per year at SEK 0.3 million net cash flow per unit for the next 6 years. The engineering department has come up with the estimate that developing the machine will take a SEK 9 million initial investment. The finance department has estimated that a 25% discount rate should be used.

a. What is the base-case NPV?

b. If unsuccessful, after the first year the project can be dismantled and will have an after-tax salvage value of SEK 5 million. Also, after the first year, expected cash flows will be revised up to 20 units per year or to 0 units, with equal probability. What is the revised NPV?

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