The sales forecasts and the abandonment option

Assignment Help Financial Management

Reference no: EM131075715

A firm is considering a project with a 5-year life and an initial cost of $135,000. The discount rate for the project is 13%. The firm expects to sell 2,400 units a year for the first 3 years. The cash flow per unit is $20. Beyond year 3, there is a 40% chance that sales will fall to 1,200 units a year for both years 4 and 5, and a 60% chance that sales will rise to 2,600 units a year, for both years 4 and 5. The firm will have the option to abandon the project after 3 years (i.e., at t=3) by selling it for $60,000 (aftertaxes). You will know which state will be realized in years 4 and 5 (should the project be continued) by the time you have to make the potential abandonment decision at t=3. What is the net present value of this project given the sales forecasts and the abandonment option?

Reference no: EM131075715

Questions Cloud

Futures contracts on treasury bonds : We have futures contracts on Treasury bonds, but we do not have features contracts on individual corporate bonds. We have cattle and hog futures but no chicken futures. Explain why the market has developed in this manner. What do you think are the mo..

Briefly describe the hedging strategy : You are the chief financial officer of a large multinational company; and six months from now you will be receiving a settlement payment of $50 million, which you plan to invest in 10-year U.S. Treasury bonds. Briefly describe the hedging strategy us..

Cost of common equity-future earnings and dividends : The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow 6% per year. Carpetto's common stock currently sells for $23.50 per share; Using the DCF approach, what is its cost of common equity? If you hav..

Horizontal and vertical analysis of balance sheets : Choose a publicly traded company and perform an expanded analysis on the financial statements. Horizontal and vertical analysis of the income statements for the past three years (all yearly balances set as a percentage of total revenues for that year..

The sales forecasts and the abandonment option : A firm is considering a project with a 5-year life and an initial cost of $135,000. The discount rate for the project is 13%. The firm expects to sell 2,400 units a year for the first 3 years. The cash flow per unit is $20. What is the net present va..

Develop incremental cash flows for replacement decision : A small factory is considering replacing its existing coining press with a newer, more efficient one. The existing press was purchased three years ago at a cost of $210,000, and it is being depreciated according to a 7-year MACRs depreciation schedul..

Interest rate parity and spot exchange rate : suppose 90-day investments in Europe have a 5 percent annualized return and a 1.25 percent quarterly (90-day) return. In the United State, 90-day investments of similar risk have a 7 percent annualized return and a 1.75 percent quarterly return. In t..

What is his attitude toward risk : Stock A has an expected return of 13 percent and a 25 percent volatility. Stock B has an expected return of 9 percent and a 30 percent volatility. An investor can only purchase one of the two stocks. The investor bought stock A. What is her attitude ..

What is the maximum price per share the private equity : ABC Waterhouse's free cash flow next year will be $250 million and it is widely expected to grow at a 5 percent annual rate indefinitely. The company's weighted average cost of capital is 11 percent, the market value of its liabilities is $2.5 billio..

User Account

All Pages