Dressler Tech is considering a 3-year project with a discount rate of 15 percent, an initial cost of $95,000, projected sales of 1,300 units on the last day of each year, and a cash flow per unit of $38. The project can be abandoned following the sales on the last day of Year 2 at which time the project's assets could be sold for an estimated $40,000. What is the net present value of this project at Time 0 if the sales forecast for Year 3 of the project is revised such that there is a 50/50 chance that the sales will be either 1,100 or 1,500 units a year?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the project, we need to calculate the present value (PV) of all the cash inflows and outflows of the project.

Year 0: Initial cost = -$95,000 
Year 1: Cash inflows = 1,300 x $38 = $49,400, PV = $43,043.48 
Year 2: Cash inflows = 1,300 x $38 = $49,400, PV = $37,452.68 
Salvage value = $40,000, PV = $27,868.85 
Year 3: Cash inflows = (0.5 x 1,100 x $38) + (0.5 x 1,500 x $38) = $38,700, PV = $25,238.56

Total PV = -$95,000 + $43,043.48 + $37,452.68 + $27,868.85 + $25,238.56 = $38,603.57

Therefore, the net present value of the project is $38,603.57. The best choice is C.

Dressler Tech Is Considering a 3-Year Project with a Discount