Your company is considering an expansion of a current product that will operate for 5 years (with...

Your company is considering an expansion of a current product that will operate for 5 years (with the option to renew the project). There is concern among management that the economy will go into a recession next year, which will cause at least 2 or 3 years of low sales of the product. To help evaluate this project, you have put together the following estimates:

If the annuity factor for 5 years at 8% is 3.9927, set up an equation to find the NPV.

NPV at year 6 {eq}= 80\%*0+20\%*$50 ...............(1) {/eq}

PV of regular cash flows (time 2-6) at the end of year 1{eq}= 20*PVIFA( 8\%, 5 ~years) = $20*3.9927 = 79.854M {/eq}

NPV at year 1 (if success) {eq}= $79.854M - $100M + (80\%*0+20\%*$50M)(1+8\%)^{-5} ............(2) {/eq}

NPV at year 0 {eq}= (2)*70\%/(1+8\%) + 30\%*0 - $10M {/eq}

{eq}= [$79.854M - $100M + (80\%*0+20\%*$50M)(1+8\%)^{-5} ] *(1+8\%)^{-1} -$10M ..............(3) {/eq}

We found equation (3) is the required equation for finding the value of NPV

By solving the equation (3) we found, NPV = -$22.35M