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Bega Products, Inc., is considering a new product launch. The firm expects to have annual operating cash flow of $4 million for the next eight years. The company uses a discount rate of 11 percent for new product launches. The initial investment is $18 million. Assume that the project has no salvage value at the end of its economic life. The present value of an Annuity of $1 per year for 8 years discounted at 11% is $5.1461 and the present value of an Annuity of $1 per year for 7 years discounted at 11% is $4.7122. All cash flows are assumed to occur at the end of the year. (Please note that no marks will be awarded if there are no workings provided in your answer.)
Required:
1. What is the NPV of the new product?
2. After the first year, the project can be dismantled and sold for$15 million after taxes. If the estimates of remaining cash flows are revised based on the first year's experience, at what level of expected cash flows does it make sense to abandon the project?
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