Consider a project with a maximum life of 5 years in selling product X. The initial cost of the project is $120,000. The
Posted: Thu May 19, 2022 7:14 am
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.
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.
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.
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.