Problem $7-24$ Expansion Decisions

Herjavec Enterprises is thinking about introducing a new surface cleaning machine. The

marketing department has come up with the estimate that the company can sell $20$ units

per year at $$195,000$ net cash flow per unit for the next five years. The engineering

department has come up with the estimate that developing the machine will take a $$14\mathrm{.}5$

million initial investment. The finance department has estimated that a discount rate of $11$

percent should be used.

a$.$ What is the base$-$case NPV$?($A negative answer should be indicated by a minus

sign. Do not round intermediate calculations and enter your answer in dollars, not

millions of dollars, rounded to $2$ decimal places, e$.$g$.,1,234,567\mathrm{.}89.)$

b$.$ If unsuccessful, after the first year, the project can be dismantled and will have an

aftertax salvage value of $$10\mathrm{.}4$ million. Also, after the first year, expected cash flows

will be revised up to $30$ units per year or down to $0$ units with equal probability. What

is the revised NPV$?($Do not round intermediate calculations and enter your answer

in dollars, not millions of dollars, rounded to $2$ decimal places, e$.$g$.,1,234,567\mathrm{.}89.)$

a$.$ Base$-$case NPV

b$.$ Revised NPV