In the previous problem, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would only be desirable if the project is a success. This implies that if the project is a success, projected sales after expansion will be 16,000. Again assuming that success and failure are equally likely, what is the NPV of the project? Note that abandonment is still an option if the project is a failure. What is the value of the option to expand?

Data from Problem 15

Suppose you think it is likely that expected sales will be revised upwards to 8,000 units if the first year is a success and revised downwards to 4,000 units if the first year is not a success.