Find project-s expected npv if it can be abandoned


Burton Inc. is considering a project which would require a $10 million investment today (t = 0).  The after-tax cash flows the factory generates will depend on whether the state imposes a new property tax.  There is a 40% probability that the tax will pass.  If the tax passes, the factory will produce after-tax cash flows of $1,500,000 at the end of each of the next 5 years.  There is a 60% probability that the tax will not pass.  If the tax does not pass, the factory will produce after-tax cash flows of $3,100,000 for the next 5 years.  The project has a WACC of 10%.  If the factory is unsuccessful, the firm will have the option to abandon the project 1 year from now if the tax passes.  If the factory project is abandoned, the firm will receive the expected $1.5 million cash flow at t = 1, and the property will be sold netting $9 million (after taxes are considered) at t = 1.  Once the project is abandoned, the company would no longer receive any cash inflows from it.  What is the project's expected NPV if it can be abandoned?

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Finance Basics: Find project-s expected npv if it can be abandoned
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