Reference no: EM132819194

Hit or Miss Sports is introducing a new product this year. If its see-at-night soccer balls are a hit, the firm expects to be able to sell 40,100 units a year at a price of $58 each. If the new product is a bust, only 23,200 units can be sold at a price of $45. The variable cost of each ball is $22 and fixed costs are zero. The cost of the manufacturing equipment is $5.94 million, and the project life is estimated at 9 years. The firm will use straight-line depreciation over the 9-year life of the project. The firm's tax rate is 35% and the discount rate is 11%.

Problem 1: If each outcome is equally likely, what is the expected NPV? (Round your answer to the nearest dollar.)

Problem 2: Suppose now that the firm can abandon the project and sell off the manufacturing equipment for $5.6 million if demand for the balls turns out to be weak. The firm will make the decision to continue or abandon after the first year of sales. Does the option to abandon change the firm's decision to accept the project?

Problem 3: If the company has an option to abandon, the project should be (accepted or rejected)