E. Abandonment Decisions Consider the following project for Hand Clapper, Inc. The company is considering a 4-year project Page 231to manufacture clap-command garage door openers. This project requires an initial investment of $18 million that will bedepreciated straight-line to zero over the project's life. An initial investment in net working capital of $950,000 is required to supportspare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $12.4 million inrevenue with $4.5 million in operating costs. The tax rate is 21 percent and the discount rate is 13 percent. The market value of theequipment over the life of the project is as follows:Year Market Value (in $ millions)1$15.0211.038.540.0a. Assuming Hand Clapper operates this project for four years, what is the NPV?b. Now compute the project NPVS assuming the project is abandoned after only one year, after two years, and after three years. Whateconomic life for this project maximizes its value to the firm? What does this problem tell you about not considering abandonmentpossibilities when evaluating projects?

NPV is the net current worth of cash flows that are expected to occur in the future.

Answered: E. Abandonment Decisions Consider the…

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter26: Capital Budgeting (capbud)

Section: Chapter Questions

Problem 5R

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Consider the following project for Hand Clapper, Inc. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires an initial investment of $16.7 million that will be depreciated straight-line to zero over the project’s life. An initial investment in net working capital of $1,070,000 is required tosupport spare parts inventory; this cost is fully recoverable whenever the project ends. The company believes it can generate $14.3 million in revenues with $5.8 million in operating costs. The tax rate is 22 percent and the discount rate is 14 percent. Themarket value of the equipment over the life of the project is as follows:d. Compute the project NPV assuming the project is abandoned after only threeyears.Year: Market Value ($ millions)1: $ 14.702: $11.703: $9.204: $1.95
Consider the following project for Hand Clapper, Inc. The company is considering a 4-year project to manufacture clap-command garage door openers. This project requires aninitial investment of $16.7 million that will be depreciated straight-line to zero over theproject’s life. An initial investment in net working capital of $1,070,000 is required tosupport spare parts inventory; this cost is fully recoverable whenever the project ends.The company believes it can generate $14.3 million in revenues with $5.8 million inoperating costs. The tax rate is 22 percent and the discount rate is 14 percent. Themarket value of the equipment over the life of the project is as follows: Year Market Value ($ millions)1 $ 14.702 11.703 9.204 1.95a. Assuming Hand Clapper operates this project for four years, what is the NPV?b. Compute the project NPV assuming the project is abandoned after only one year.c. Compute the project NPV assuming the project is abandoned after only two years.d. Compute the…
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