A. SI Inc. is considering investing in a new product named Z90. There is a 50% chance that the product will be a success, which then generates $110,000 cash inflow each year for the next 5 years. There is a 50% chance that the product will fail, which then generates $25,000 cash inflow each year for the next 5 years. The project requires an initial investment of $250,000. Based on the above information, what is the expected net present value of this Z90 project if the cost of capital is 12%? Please show all work.
B. Now, assume that one year from now, SI Inc. will know whether the Z90 has become the industry standard. Assume also that after receiving the cash flow at t = 1, SI Inc. has the option to abandon the Z90 project, in which case it will receive an additional $100,000 at t = 1 but no cash flows after t = 1. Assuming that the cost of capital remains at 12%, what is the estimated value of the abandonment option? Please show all work.