The Nu-Tech Company Has a New Project Available to It

question 27

Essay

The Nu-Tech Company has a new project available to it at a cost of $6,000,000. If the project is accepted,the company will be able to sell 13,000 personal organizers at $172 in net cash flow for each of the next five years. Nu-Tech's discount rate is 15%. What is the NPV of the investment?
The executives of Nu-Tech are concerned about the potential of future competition and a subsequent drop in sales and price. If after two years you can dispose of the asset for $1,000,000 at what price would it make sense to abandon the project?
A._15,2 + $1,000,000 * (1/1.15)² + X (A._15,3)(1/1.15)²
X = $800,627.60; if they sell 13,000 units they should abandon the project if the price drops below $61.59 in years three and out.
A._15,5= $-6,000,000 + $7,495,418.80 = $1,495,418.80
Abandon: 0 = $-6,000,000 + $2,236,000 *

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Definitions:

Confederation Government

A form of government in which states or regional governments retain substantial independence, often with a weak central authority, such as the United States under the Articles of Confederation.

Power to Tax

The authority granted to governments to collect taxes from individuals and businesses to fund public expenditures.

Three-Fifths Compromise

A historical agreement made during the 1787 United States Constitutional Convention, counting three out of every five slaves as people for determining state representation and taxation.

Confederation Congress

The governing body of the United States under the Articles of Confederation, in operation from 1781 to 1789.