19. JellaCo, which has a required rate of return of 14%, is considering selling a new product. If demand for the product is high, income from the product will be $700,000 per year over the product’s 8-year life. If demand for the product is low, income from the product will be $200,000 per year. Development costs will total $2,000,000. JellaCo will make deals with suppliers that will require them to produce the product for 3 years, but at that point it could decide to cease production and sell the related assets for $800,000 during Year 4. JellaCo estimates that there is a 65% chance that demand will be high.

a. Calculate the net present value of the project using the expected value of its future cash flows, without considering choices available to management.

b. Calculate the value of the project using real options analysis.

c. Calculate the value of the real options associated with the project.