Postcompletion Audit
A. Two years ago, a new product capital project was approved for $75 million based upon the cash flows listed below. Calculate the net present value for the original proposal at an 18 percent discount rate.
|
Year
|
Original Proposal
|
|
0
|
$(75)
|
|
1
|
2
|
|
2
|
20
|
|
3
|
30
|
|
4
|
38
|
|
5
|
55
|
B. The three-year postcompletion audit contains a financial reevaluation of this project. The postcompletion audit reflects an overrun of $2 million during the implementation of the equipment (year 0) and ongoing performance that fell $6 million short of the year 1 projection and $5 million short of the year 2 projection. Marketing assures us that the wrinkles have been worked out, and starting this year, performance will improve to the level originally projected. Recalculate the net present value.
C. What additional questions would you want to ask Marketing regarding this new product and its forecasts for the remaining three years?