Computation of base case npv and abandonment option

Reference no: EM1312819

Computation of Base Case NPV and abandonment option of a Project

We are examining a new project. We expect to sell 6,000 units per year at $130 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $130 × 6,000 = $780,000. The relevant discount rate is 16 percent, and the initial investment required is $3,500,000.

(a) What is the base-case NPV?

(b) After the first year, the project can be dismantled and sold for $2,500,000. 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) Suppose you think it is likely that expected sales will be revised upwards to 8,000 units if the first year is a success and revised downwards to 4,000 units if the first year is not a success. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering.

(d) What is the value of the option to abandon?

Reference no: EM1312819

Questions Cloud

Prepare the sales portion of the entry for this sale : Prepare the sales portion of the entry for this sale on Randy's books and Prepare the cost of sales portion of the entry for this sale on Randy's books.

Probability value based on log normal distribution : What is the expected number of customers that will have to wait more than 6 hours?

Determine the magnitude of the centripetal acceleration : When the cylinder is rotating at 2.0 revolutions per second, determine the magnitude of the centripetal acceleration at the outer wall?

Prepare the entry for janet''s spa, for this purchase : Assuming the Perpetual Inventory System is used, complete journal entries for the following transactions as directed - Prepare the entry for Janet's Spa, for this purchase

Computation of base case npv and abandonment option : Computation of Base Case NPV and abandonment option of a Project

Compute the international supply and global monopoly : Suppose we have a competitive market for a good with domestic demand and supply given by:

Estimating the expected value for given distribution : Determine the cost Xs to develop the support system for which the probability of exceeding Xs is equal to 0.01?

Accounts receivable at the end of august are : The Pitney Company's sales are 40% cash and 60% credit. 50% of credit sales are collected in the month of sale, 30% in the month following the sale, and 20% is collected two months after Accounts receivable at the end of August are?

Advantages of nitrogen fixing plants to humans : Explain the advantages of Nitrogen fixing plants to the humans and its role within the ecosystem in detail. Browse the Internet and select a way (other than giving the oxygen) that plants are useful to the humans.

User Account

All Pages