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Abandonment Value
We are examining a new project. We expect to sell 7,000 units per year at $38 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $38 x 7,000 = $266,000. The relevant discount rate is 16 percent, and the initial investment required is $1,040,000.
A) What is the base-case NPV?
B) After the first year, the project can be dismantled and sold for $820,000. 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 $820,000 abandonment value can be viewed as the opportunity cost of keeping the project in one year.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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