Applied Nanotech is thinking about introducing a new surface cleaning machine. T

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 15 units per year at $311,000 net cash flow per unit for the next four years. The engineering department has come up with the estimate that developing the machine will take a $14.8 million initial investment. The finance department has estimated that a discount rate of 10 percent should be used.

What is the base-case NPV? (A negative answer should be indicated by a minus sign. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your 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 $11.6 million. Also, after the first year, expected cash flows will be revised up to 20 units per year or to 0 units, with equal probability. What is the revised NPV? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your 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 15 units per year at $311,000 net cash flow per unit for the next four years. The engineering department has come up with the estimate that developing the machine will take a $14.8 million initial investment. The finance department has estimated that a discount rate of 10 percent should be used.

Explanation / Answer

A:NPV= CF 1/(1+r)^1+ CF2/(1+r)^2+ CF3/(1+r)^3+CF4/(1+r)^4 – Initial cost

= (15*311000)/1.1+(15*311000)/1.1^2 + (15*311000)/1.1^3+ (15*311000)/1.1^4 – 14,800,000

= -12577.7

B: NPV= CF 1/(1+r)^1- Initial cost+ Salvage/(1+r)^1

Expected Cash flow in year 1= 20*311000*0.5 + 0= 3110,000

NPV= 3110,000/1.1^1 – 14800,000 + 11600,000/1.1^1 = -1,427,273

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