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 $ 430,000 net cash flow per unit for the next five years. The engineering department has come up with the estimate that developing the machine will take a $ 20 million initial investment. The finance department has estimated that a 20 percent discount rate should be used.
What is the base-case NPV? Make sure to show all your work below.
If unsuccessful, after the first year the project can be dismantled and will have an after-tax salvage value of $ 12 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? Make sure to show all your work below.
What is the maximum value of the option described in part (b)? Make sure to show all your work below.