Answer Happy

Question 2 (10 marks) Consider a project with a maximum life of 5 years in selling product X. The initial cost of the project is $120,000. The firm expects to sell 2,200 units of product X each year for the first 3 years at a net relevant cash flow of $20 per unit, and it expects to sell 1,400 units each year for the final 2 years at the same cash flow per unit ($20). The appropriate discount rate of the project is 12%. a) Calculate the Net Present Value (NPV) of the project, and briefly discuss (with a sentence) whether the project should be invested. (4 marks) b) Assume the firm has the option to abandon this project at the end of the third year at which time it could sell the project for $50,000, and stop selling product X in year 4 and year 5. Calculate the market value of the project, the value of the option to abandon (if any), and briefly discuss (with a sentence) whether the project should be invested now and abandoned at the end of the third year. (6 marks)