Reference no: EM131835304

An investor paid $100,000 for a machine today (time 0) that is estimated to have a 70% probability of sucessfully producing 5,000 product units per year for each of the next 3 years, at which time he macine is estimated to be obsolete with a salvage value of 0. Product price (the unknow, X, yet to be calculated) is estimated to be $X per unit in year 1 escalated dollars to increase 10% per year in year 2 and 6% in year 3, Total operating costs are estimated at $8,000 in year 1 escalated dollars and to increase by 15% in year 2 and 8% in year 3. The annual inflation rate is estimated at 7%. Determine the year 1, 2 and 3 escsalated dollar product selling price necessary for the investor to receive a 12% annually compounded constand dollar expected DCFROR on invested dollars? Consider zero cash flow to be realized the 30% of the time the project fails. This assumes that equipment dismantlement costs will exactly offset any salvage value benefits.