Multicorp is considering marketing a new product that will require an investment of $1,000,000.

The product will have a life of 5 years, and is expected to produce income of $450,000 each year.

However, there is a 10% chance that a competitor will beat Multicorp to market with a similar product, in which case cash flows will only be $200,000 each year. If Multicorp were to discontinue the product, it could license the technology to another firm, which would result in a one-time cash flow of $800,000. The company’s required rate of return is 12%.

Calculate the net present value of the project using the expected value of its future cash flows.

Calculate the value of the project using real options analysis.

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