The Option to Shut Down or Reopen a Project
We are examining a new project. We expect to sell...

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The Option to Shut Down or Reopen a Project
 We are examining a new project. We expect to sell 10,000 units a year of a new golf video at $200 net cash flow each for the next five years. The relevant discount is 15 percent and the initial required investment is $7 million.
a. What is the base case NPV?
b. After the first year, the golf video project can be abandoned and the machinery sold for $100,000. At what level of sales would it make sense to abandon the project?

Robert · Accepted Answer

The Option to Shut Down or Reopen a Project 
We are examining a new project. We expect to sell 10,000 units a year of a new golf video at $200 net 
cash flow each for the next five years. The relevant discount is 15 percent and the initial required 
investment is $7 million. 
a. What is the base case NPV? 
b. After the first year, the golf video project can be abandoned and the machinery sold for $100,000. At 
what level of sales would it make sense to abandon the project? 
Solution:

The Option to Shut Down or Reopen a Project We are examining a new project. We expect to sell 10,000 units a year of a new golf video at $200 net cash flow each for the next five years. The relevant...

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