Allied Inc. is considering a new product launch. We expect to sell 7,000 units p

Question

Allied Inc. is considering a new product launch. We expect to sell 7,000 units per year at $38 net cash flow a piece for the next 10 years. In other words, the annual operating cash flow is projected to be 38*7,000=$266,000. The relevant discount rate is 16%. and the initial investment is $1,040,000. After the first year, the project is equally likely to be revised upward to 9,500 units or downward to 3,800 units. The project can be dismantled and sold for $820,000. Considering the possibility of abandonment, what is the NPV of the project?

A. $245,638.51

B. $259,552.73

C. $665,184.94

D. $1,507,481.17

Explanation / Answer

Answer: B, 259552.73

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