ABC Ltd. currently is running in a very stable business environment. It current annual sales amount to $200,000 with an EBIT margin of 50%. Specifically, ABC has no capital expenditures, other income, or changes in net working capital. Its annual depreciation costs are $6000 currently and will decrease at a constant rate of 40% per year. ABCs annual interest expense is $12,000 for its perpetual debt. ABC is considering issuing new debt and purchasing a machine for $120,000 to replace a currently rented machine. The machine can boost sales by $12,500 per year and save the company annual rental costs of $8,000. The machine is purchased today. The life of the machine is ten years. Assume that the machines will be depreciated via the straight-line method over the five-year life of the machine for tax purposes. The salvage value of the machine is $9500. There is no other change on operating costs. Suppose the appropriate discount rate for the project is 10% per year. Its cost of equity is 12%. Its cost of debt is 6%. Risk-free rate is 2.5%. The marginal corporate tax rate is 30%. The investment does not change the firms net working capital.

Suppose ABC is now offered with an option to abandon the project at the end of the third year: if ABC pays extra $5,000 when buying the machine, the maker of the machine is willing to buy back the machine in three years for $30,000. The volatility in the value of the project is 30%. Answer the following questions (i. to ii.) considering such an option to abandon: i. Calculate and used in Black-Scholes Model to value the option to abandon.(7 marks) ii. Calculate the value of the option to abandon. Should ABC invest in the project? (6 marks)