Question

We are examining a new project. We expect to sell 5,300 units per year at $67 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $67 × 5,300 = $355,100. The relevant discount rate is 16 percent, and the initial investment required is $1,520,000. a. What is the base-case NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) NPV $__ b. After the first year, the project can be dismantled and sold for $1,240,000. If expected sales are revised based on the first year’s performance, below what level of expected sales would it make sense to abandon the project? (Do not round intermediate calculations. Round your answer to the nearest whole number.) Level of expected sales_ units 2. In each of the following cases, find the unknown variable. Ignore taxes. (Do not round intermediate calculations.) Accounting Breakeven | Unit Price | Unit Variable Cost | Fixed Costs | Depreciation 128,500 | $56 | $46 | $1,000,000 | $_ 333,000 | _ | $56 | $5,600,000 | $1,060,000 7,500 | $92 | | $440,000 | $100,000 3. B&B has a new baby powder ready to market. If the firm goes directly to the market with the product, there is only a 55 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1.29 million. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 70 percent. If successful, the baby powder will bring a present value profit (at time of initial selling) of $19.9 million. If unsuccessful, the present value payoff is only $6.9 million. The appropriate discount rate is 15 percent. Calculate the NPV for the firm if it conducts customer segment research, and if it goes to market immediately. (Enter your answers in dollars, not millions of dollars (e.g., 1,234,567). Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).) NPV Market immediately $_ Research option $_______

          We are examining a new project. We expect to sell 5,300 units per year at $67 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $67 × 5,300 = $355,100. The relevant discount rate is 16 percent, and the initial investment required is $1,520,000.

a. What is the base-case NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
NPV $__________

b. After the first year, the project can be dismantled and sold for $1,240,000. If expected sales are revised based on the first year’s performance, below what level of expected sales would it make sense to abandon the project? (Do not round intermediate calculations. Round your answer to the nearest whole number.)
Level of expected sales_____________ units

2. In each of the following cases, find the unknown variable. Ignore taxes. (Do not round intermediate calculations.)

Accounting Breakeven | Unit Price | Unit Variable Cost | Fixed Costs | Depreciation
128,500 | $56 | $46 | $1,000,000 | $_________
333,000 | _______ | $56 | $5,600,000 | $1,060,000
7,500 | $92 | ________ | $440,000 | $100,000

3. B&B has a new baby powder ready to market. If the firm goes directly to the market with the product, there is only a 55 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1.29 million. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 70 percent. If successful, the baby powder will bring a present value profit (at time of initial selling) of $19.9 million. If unsuccessful, the present value payoff is only $6.9 million. The appropriate discount rate is 15 percent.

Calculate the NPV for the firm if it conducts customer segment research, and if it goes to market immediately. (Enter your answers in dollars, not millions of dollars (e.g., 1,234,567). Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).)

NPV
Market immediately $_______________ 
Research option $_______________

Added by Esperanza S.

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