Question: EVALUATION OF THE FIRM AND ACTUAL OPTIONS
We're looking at a new project. We plan to sell 7,600 units per year, $ 68 per unit, for the next 10 years. In other words, the annual cash flow should be $ 68 x 7600 = $ 516800. The cost of capital (the relevant discount rate) is 14%, and the initial investment amount is $ 2,300,000.
A) What is the NPV of the project? (Precision: this is the static NPV)
B) After the first year, the project can be dismantled and sold for $ 1,400,000. If the duscounted sales are revised according to the performance of the first year, when would it Wise to abandon the investment? In other words, at which level of sales, would it be Wise to abandon the project?