Dressler Technologies is considering a project with a 3-year life and an initial cost of $85,000. The discount rate for the project is 14.5 percent. The firm expects to sell 1,200 units on the last day of each year. The cash flow per unit is $32. The firm will have the option to abandon this project at the end two years (after year 2 sales) at which time the project's assets could be sold for an estimated $30,000. The firm's managers are interested in knowing how the project will perform 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 1,000 or 1,400 units a year. What is the net present value of this project at time zero given the current sales forecasts?

Question

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Level to abandon = $30,000 = $32Q/1.145; Q = 1,073.44 unitsAt 1,000 units, you will abandon the project and receive $30,000 at the end of year 2.At 1,400 units, you will continue the project and the project will have a value at the end of year 2 of:NPV_{End of year 2} = (1,400 F1F1F1S1F1F1F10 $32)/1.145 = $39,126.64The NPV of this project today is:

Dressler Technologies Is Considering a Project with a 3-Year Life