We are examining a new project. We expect to sell 5,100 units per year at $65 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $65 × 5,100 = $331,500. The relevant discount rate is 15 percent, and the initial investment required is $1,500,000. After the first year, the project can be dismantled and sold for $1,220,000. Suppose you think it is likely that expected sales will be revised upward to 8,100 units if the first year is a success and revised downward to 3,700 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 $