Fnce 3010

FNCE 3010 (Durham). HW 9 real resources 1. ABC Sporting Goods is examining a hurl to produce a new line of tennis rackets. The assert is expected to sell 7000 units per twelvemonth with a net bills ?ow of $60 per unit. The shed will run for 10 years, the discount ramble is 16%, and an initial investment of $2.1 meg is required. The stand let on has no salvage value at the displace of 10 years. Ignore taxes. (a) What is the base case NPV? (b) Now, suppose that at the closure of the ?rst year, the be after can be dismantled and interchange for $1.4 million. At what level of sales would it make sense to vehemence the consider? (c) Suppose that sales turn out to be any 5000 units or 9000 units per year, each with probability 50%. The veritable scenario is observe at the end of the ?rst year. Taking the option to part with into peak, what is the projects NPV? (d) What is the value of the option to abandon? answer: (a) exploitation an initial exchange ?ow of - 2.1 million followed by 10 cash ?ows of 420,000 each and a discount rate of 16%, rate NPV. You should bring NPV = -$70,044.46. (b) Since the opportunity cost of continuing the project is 1.4 million and the project has 9 years left, use your estimator with n=9, R=16%, PV=?1.4 million and FV=0. Solve for the PMT. You should ?nd PMT=303,915.48.

At $60 per unit, this means the ?nancial break-even at the end of year 1 is 5066. Below that level, the project should be terminated. (c) Low scenario: devastate: NPV (at t=1) = 1.4 + .3 = $1.7 million. relate: 10 cash ?ows of $300,000 each with R = 16% implies NPV (at t= 1) = $1,681,963. They should abandon. High s! cenario: Abandon: NPV (at t=1) = 1.4 + .54 = $1.94 million. Continue: 10 cash ?ows of $540,000 each with R = 16% implies NPV (at t=1) = $3,027,534. They should continue. pass judgment NPV at time 0 = -2.1 + (.5*1.70 + .5*3.027534)/1.16 = -$62,270. (d) level taking into account the option to abandon, the project should be rejected. The option has no value. 1 2. Garages R Us (GRU) is...If you want to get a full essay, evidence it on our website: OrderCustomPaper.com

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