Evaluating a project in the united states

Reference no: EM131126892

A Canadian firm, is evaluating a project in the United States. This project involves the establishment of a lumber mill in Wisconsin to process Canadian timber. The factory expects to service clients in the construction industry. All cash flow figures are in thousands.

Initial Investment. The initial investment is CAD 25,000. The project is over a period of three years. This investment will be depreciated straight line to zero. Operating Results. The firm expects two equally likely scenarios for the first year of operations.

Under the favorable scenario, the firm expects to produce and sell 1,200 units of a product. Under the unfavorable scenario, it expects to produce and sell only 600 units. The selling price is expected to be CAD 25; the variable expense is expected to be CAD 10, and fixed costs
excluding depreciation are expected to be CAD 3,500.

Additional Investment. If the firm encounters the favorable scenario during year 1, it could make an investment of CAD 15,000 to enable it to produce and sell a total of 3,500 units (additional units is 2,300) in the second and third years. The cost parameters remain unchanged with the
exception of depreciation. This secondary investment will be depreciated equally in years 2 and 3. If the firm chooses not to make the investment in year 1, the results of year 1 will be repeated during years 2 and 3.

Discount Rate and Miscellaneous. Assume a discount rate of 9 percent and zero taxes.
a. Estimate the NPV of the project.
b. Estimate the NPV of the option to expand.

Reference no: EM131126892

Questions Cloud

How much has the problem changed over the past year : This article summarizes the 2008 Social Security Trustees Report. It identifies several important questions to ask about Social Security- How much has the problem changed over the past year?

Did any part of the film surprise you : Did any part of the film surprise you? Do you think someone with a disability, of a different sexual orientation, an older American or some of a different religion would also find it surprising? Why or why not?

What is the equilibrium temperature of the aluminum : What is the equilibrium temperature of the aluminum and water mixture for the second group?

Employees the choice between private insurance company plan : MTOP Inc. offers its employees the choice between a private insurance company plan (Blue Cross/Blue Shield), an HMO, and a POS. Ronald needs to review the packet and make a decision on which health care program fits his needs. The following is an ove..

Evaluating a project in the united states : A Canadian firm, is evaluating a project in the United States. This project involves the establishment of a lumber mill in Wisconsin to process Canadian timber. The factory expects to service clients in the construction industry. All cash flow fig..

What effect will have on the telescope resolving power : If the primary lens or mirror of a telescope is doubled in size, what effect will this have on the telescope's theoretical resolving power

What is the ratio of the volume of the bubble as it reaches : Would it be safe for the diver to hold his breath while ascending from the bottom of the lake to the surface? Why or why not?

What is the effect on the rate of hydrolysis of atp to adp : An enzyme catalyzes the formation of ATP from ADP and phosphate ion. - What is its effect on the rate of hydrolysis of ATP to ADP and phosphate ion?

What are the boundary points of the feasible region : Billy Penny is trying to determine how many units of two types of lawn mowers to produce each day. One of these is the Deluxe model, while the other is the Standard model. The profit per unit on the Deluxe model is $40, while the profit per unit on t..

User Account

All Pages