Question 1

Question 2

We are examining a new project. We expect to sell 6,300 units per year at $57 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $57 x 6,300-$359,100. The relevant discount rate is 12 percent, and the initial investment required is $1,740,000. After the first year, the project can be dismantled and sold for $1,610,000. Suppose you think it is likely that expected sales will be revised upward to 9,300 units if the first year is a success and revised downward to 4,900 units if the first year is not a success. Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold Naturally, expansion would be desirable only if the project were a success. This implies that if the project is a success, projected sales after expansion will be 18,600. Note that abandonment is an option if the project is a failure a. If success and failure are equally likely, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the option to expand? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. NPV b. Option value 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 15 units per year at $297,000 net cash flow per unit for the next four years. The engineering department has come up with the estimate that developing the machine will take a $13.9 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., 1,234,567.89.) b. If unsuccessful, after the first year, the project can be dismantled and will have an aftertax salvage value of $10.2 million. Also, after the first year expected cash flows will be revised up to 20 units per year or down to O 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., 1,234,567.89.) a. Base-case NPV b. Revised NPV We are examining a new project. We expect to sell 6,300 units per year at $57 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $57 x 6,300-$359,100. The relevant discount rate is 12 percent, and the initial investment required is $1,740,000. After the first year, the project can be dismantled and sold for $1,610,000. Suppose you think it is likely that expected sales will be revised upward to 9,300 units if the first year is a success and revised downward to 4,900 units if the first year is not a success. Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold Naturally, expansion would be desirable only if the project were a success. This implies that if the project is a success, projected sales after expansion will be 18,600. Note that abandonment is an option if the project is a failure a. If success and failure are equally likely, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the option to expand? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. NPV b. Option value 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 15 units per year at $297,000 net cash flow per unit for the next four years. The engineering department has come up with the estimate that developing the machine will take a $13.9 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., 1,234,567.89.) b. If unsuccessful, after the first year, the project can be dismantled and will have an aftertax salvage value of $10.2 million. Also, after the first year expected cash flows will be revised up to 20 units per year or down to O 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., 1,234,567.89.) a. Base-case NPV b. Revised NPV