Hit or Miss Sports

  

Hit or Miss Sports is
introducing a new product this year. If its see-at-night soccer balls are a
hit, the firm expects to be able to sell 53,000 units a year at a price of $40
each. If the new product is a bust, only 33,000 units can be sold at a price of
$35. The variable cost of each ball is $10, and fixed costs are zero. The cost
of the manufacturing equipment is $6.0 million, and the project life is
estimated at 10 years. The firm will use straight-line depreciation over the
10-year life of the project. The firm’s tax rate is 30%, and the discount rate
is 14%.

a-1. If each outcome is equally likely,
what is expected NPV? (Negative amount should be indicated by a minus sign. Do
not round intermediate calculations. Enter your answer in dollars not in
millions. Round your answer to the nearest dollar amount.)
Expected NPV $
a-2. Will
the firm accept the project?
Yes
No

b-1. Suppose now that the firm can abandon the project and
sell off the manufacturing equipment for $5.40 million if demand for the balls
turns out to be weak. The firm will make the decision to continue or abandon
after the first year of sales. What is expected NPV? (Negative amount should be
indicated by a minus sign. Do not round intermediate calculations. Enter your
answer in dollars not in millions. Round your answer to the nearest dollar
amount.)
Expected NPV $
b-2. Does
the option to aban***** *****ge the firm’s decision to accept the project?
Yes
No