Reference no: EM133000000
Suppose you are examining a new project and you expect to sell 8,750 units per year at $189 net cash flow apiece (including CCA) for the next 16 years. The relevant discount rate is 14 percent, and the initial investment required is $5,500,000.
1) What is the base-case NPV?
2) After the first year, the project can be dismantled and sold for $2,800,000. If expected sales are revised based on the first year's performance, when would it make sense to abandon the investment? In other words, at what level of expected sales would it make sense to abandon the project?
3) Suppose you think it is likely that expected sales will be revised upwards to 9,500 units if the first year is a success and revised downwards to 4,300 units if the first year is not a success. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering.
4) Is option to abandon worthy in this case, why?
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