We are examining a new project. We expect to sell 5,300 units per year at $67 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $67 × 5,300 = $355,100. The relevant discount rate is 16 percent, and the initial investment required is $1,520,000. After the first year, the project can be dismantled and sold for $1,240,000. Suppose you think it is likely that expected sales will be revised upward to 8,300 units if the first year is a success and revised downward to 3,900 units if the first year is not a success.
a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
NPV $
b. What is the value of the option to abandon? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Option value $