21. Robinson Manufacturing, which has a 12% required rate of return, is planning to invest in a new manufacturing facility. The facility would cost $2,000,000 to build, and would require fixed costs of $400,000 per year to operate. The facility would be used to produce goods that could generate a contribution margin of $950,000 per year for the next 10 years. However, Robinson estimates that there is a 20% chance that demand for the company’s products will not be sufficient to support production at the new plant in addition to its existing plant, which would result in the facility’s generating no additional sales. If this is the case, Robinson could choose to suspend operations at the new facility, which would reduce fixed costs by 75% while operations are suspended. Robinson would discover the demand for the product by the time the facility is complete.

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.