A company is considering investing in a project. The present value (PV) of future discounted expected cash flows is either 3000 if the market goes up or 500 if the market goes down next year. The objective probability the market will go up is 20%. The appropriate risk-adjusted rate of return (cost of capital) is 25%. The initial capital investment required at time 0 is 1200. The risk-free rate is 10% per year.

a. Determine the PV of the project at time 0.

b. Determine the NPV of the project at time 0.

c.Should the company invest in this project?

d. Upon closer inspection the CFO realizes the company actually has some flexibility in managing this project. Specifically, if the market goes down, the company can abandon the project, and liquidate its original capital investment for 75% of its original value. If, however, the market should go up, the company could expand operations, which would result in twice the original PV. To expand the company will have to make an additional capital expenditure of 800. The CFO wants to know if the company should now proceed with the project with the addedflexibility, and asks for you advice.