Applied Nanotech is thinking about introducing a new surface cleaning machine. T
ID: 2653799 • Letter: A
Question
Applied Nanotech is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that Applied Nanotech can sell 14 units per year at $296,000 net cash flow per unit for the next five years. The engineering department has come up with the estimate that developing the machine will take a $13.6 million initial investment. The finance department has estimated that a 16 percent discount rate should be used.
What is the base-case NPV? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
If unsuccessful, after the first year the project can be dismantled and will have an aftertax salvage value of $10.1 million. Also, after the first year, expected cash flows will be revised up to 19 units per year or to 0 units, with equal probability. What is the revised NPV? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Applied Nanotech is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that Applied Nanotech can sell 14 units per year at $296,000 net cash flow per unit for the next five years. The engineering department has come up with the estimate that developing the machine will take a $13.6 million initial investment. The finance department has estimated that a 16 percent discount rate should be used.
Explanation / Answer
a) Statement showing calculation of NPV Particulars Time PVF@16% Amount PV(Amount *PVF) Cash Outflows(Invt in project) - 1.0000 (13,600,000.000) (13,600,000.00) PV of Cash Outflows (13,600,000.00) Cash Inflows(Net of Tax) 1.000 0.8621 4,144,000.000 3,572,413.79 Cash Inflows(Net of Tax) 2.000 0.7432 4,144,000.000 3,079,667.06 Cash Inflows(Net of Tax) 3.000 0.6407 4,144,000.000 2,654,885.40 Cash Inflows(Net of Tax) 4.000 0.5523 4,144,000.000 2,288,694.31 Cash Inflows(Net of Tax) 5.000 0.4761 4,144,000.000 1,973,012.34 PV of Cash Inflows 13,568,672.90 NPV (31,327.10) Sale Value per unit 296,000.000 No of units 14.000 Total Sales revenue(296,000*14) 4,144,000.000 Base case NPV = -$31,327.10 b) Statement showing calculation of NPV Particulars Time PVF@16% Amount PV(Amount *PVF) Cash Outflows(Invt in project) - 1.0000 (10,100,000.000) (10,100,000.00) PV of Cash Outflows (10,100,000.00) Cash Inflows(Net of Tax) 1.000 0.8621 2,812,000.000 2,424,137.93 Cash Inflows(Net of Tax) 2.000 0.7432 2,812,000.000 2,089,774.08 Cash Inflows(Net of Tax) 3.000 0.6407 2,812,000.000 1,801,529.38 Cash Inflows(Net of Tax) 4.000 0.5523 2,812,000.000 1,553,042.57 PV of Cash Inflows 7,868,483.95 NPV (2,231,516.05) Revised NPV = -$2,231,516.05 Sale Value per unit 296,000.000 296,000.000 No of units 19.000 - Total Sales revenue(296,000*14) 5,624,000.000 - Probability 0.500 0.5000 Net Sales Revenue 2,812,000.000
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