In the previous problem, suppose you think it is likely that expected sales will be revised upward to 19,000 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.

b. What is the value of the option to abandon?

Data from Previous Problem

We are examining a new project. We expect to sell 14,000 units per year at $64 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $64 × 14,000 = $896,000. The relevant discount rate is 11 percent, and the initial investment required is $3.95 million.