At what level of expected sales would it make sense

Assignment Help Financial Management

Reference no: EM131913000

We are examining a new project. We expect to sell 7,000 units per year at $38 net cash flow per unit for the next 10 years. The relevant discount rate is 16%, and the initial investment required is $1,040,000.

1) What is the base-case NPV?

2) 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?

3) Explain how the $820,000 abandonment value can be viewed as the opportunity cost of keeping the project in one year.

4) Suppose you think it is likely that expected sales will be revised upward to 9,500 units if the first year is a success and revised downward to 3,800 units if the first year is not a success.

Success and failure and equally likely. What is the NPV of the project?

(Consider the possibility of abandonment in answering.) What is the value of the option to abandon? please show work

Reference no: EM131913000

Questions Cloud

Compute the standard deviation : Show that the mean of the finite population is 7.5 and variance is 2.9167. Compute the standard deviation.

Describe etiology and prognosis of the particular disability : Describe the etiology and prognosis of the particular disability/impairment you chose. Discuss specific diagnostic procedures and evaluations that would typical

Find the probability that javier volunteers : What values does x take on? Find the probability that Javier volunteers for less than three events each month.

Calculate the unit sales and dollar sales to attain target : Calculate the unit sales and the dollar sales to attain the target profit of $500,000 using the formulas demonstrated in the text.

At what level of expected sales would it make sense : If expected sales are revised based on the first year's performance, when would it make sense to abandon the investment?

Regression equation for the depression screening : If the regression equation for the depression screening example was Y=0.40 + 10(X), then a score of 20 on the screening test (X)

Compute the net present value of the machine : Mayberry Textiles Inc. is considering the purchase of a new machine which has an initial cost of $400,000. Compute the net present value of the machine.

What is the current price of the bond : 12 years ago, Mini Max Inc. issued 30 year to maturity zero-coupon bonds with a par value of $1,000.

Estimating the average salaries of police officers : A researcher is interested in estimating the average salaries of police officers in a large city. She wants to be 95% confident that her estimate is correct.

User Account

All Pages