a. Michael Fullen is discussing the evaluation of capital budgeting projects with his coworker, Katina Katzenmoyer. During conversation, Katzenmoyer makes the following statements regarding the determination of real option values: Statement 1: For independent projects, an analyst must determine a value for the real option that is separate from the project regardless of the profitability of the project. Statement 2: Abandonment options can be valuable, but should only be exercised when the abandonment value is greater than the discounted present value of the remaining cash flows of the project. Are each of the statements made by Katzenmoyer correct? Explain your answer. (16 marks)

b. Takamura Motors is evaluating a new piece of equipment that will automatically install power windows in cars coming off the production line. The equipment cost is $3.5 million, and the firm estimates that the present value of the annual cost savings from installing the equipment is $2.8 million. The production manager is also considering purchasing a module that will allow the equipment to be used for Takamuras SUV production. The additional module represents a real option with a cost of $1.1 million dollars. The production manager estimates that adding the module would give Takamura cost savings of an additional $2.0 million. What is the profitability of the project before and after considering the real option?