1. Estimating the value of the option to abandon: Jethro Corp. makes t-shirts. Jethro has recently developed the technology to produce a new, unshrinkable t-shirt. Jethro's directors have recommended that the firm develop some prototypes and test market the new t-shirts. Testing and development will take one year and will cost $10,000. The test will be successful with 65% probability. If the test is successful, Jethro can begin full-scale production with an investment of $50,000 at t-1. Production will run three years and cash flows will be $25,000 (with a successful test) or $10,000 (if the firm invests after an unsuccessful test) each year (starting at t-2). Jethro's managers will use a 10% discount rate for all phases of the project. A. What is the NPV at t-1 of investing if the test is successful? Unsuccessful? B. Supposing (unrealistically) that Jethro will be forced to undertake full scale production regardless of the test results, what is the NPV of the project at t-0? C. Now suppose (more realistically) that Jethro can choose to invest based on the outcome of the test. What is the NPV of the project at t-0? D. Finally (and most realistically) assume that Jethro can, if they choose not to invest (and abandon the project), sell the results of their test for $15,000 to a competitor. What is the NPV of the project at t-0 with this new option included? E. From the calculations above, provide a ballpark estimate for the value of the option to abandon in this project, i.e., compare the NPVs from part C and D and discuss why they are different. F. What are the differences in the NPVs at t 1 for success and failure under the scenario from part E where Jethro must go ahead with production regardless of the outcome of the test? G. What are the differences in the NPVs at t=1 for success and failure under the scenario from part C where Jethro can choose to invest based on the outcome of the test? H. Compare your responses to parts F and G above. What do these lead you to conclude about the effect of the option to abandon on a project's risk? How would you further incorporate this conclusion into the analysis