Ace Hardware has come up with a new gadget prototype and is ready to go ahead with pilot production and test marketing. The pilot production and test marketing phase will last for one year and cost $480,000. Your management team believes that there is a 55% chance that the test marketing will be successful and that there will be sufficient demand for the new gadget. If the test-marketing phase is successful, then Ace Hardware will invest $2.8 million in year 1 to build a plant that will generate expected annual after-tax cash flows of $380,000 in perpetuity beginning in year 2. If the test marketing is not successful, Ace Hardware can still go ahead and build the new plant, but the expected annual after-tax cash flows would be only $180,000 in perpetuity beginning in year two. Ace Hardware has the option to stop the project at any time and sell the prototype gadget to an overseas competitor for $250,000. Ace Hardware's cost of capital is 11.60%. Assume that Ace Hardware has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately and that the probability of high vs. low demand would still be 55% vs. 45%, respectively. What is the value of the option to do pilot production and test marketing? (Hint: the value of an option is the difference between the NPV of a project with the option and the NPV of the project without the option)

		$140,926.29
		$148,126.29
		$155,326.29
		$162,526.29
		$169,726.29