Expansion Decisions Applied Nanotech is thinking about introducing a new surface cleaning machine.

The marketing department has come up with the estimate that Applied Nanotech can sell 10 units per year at £0.3 million net cash flow per unit for the next five years. The engineering department has come up with the estimate that developing the machine will take a £10 million initial investment. The finance department has estimated that a 25 per cent discount rate should be used.

(a) What is the base-case NPV?

(b) If unsuccessful, after the first year the project can be dismantled and will have an after-tax salvage value of £5 million. Also, after the first year, expected cash flows will be revised up to 20 units per year or to 0 units, with equal probability. What is the revised NPV?