Asia Berjaya Group is thinking about introducing a new surface cleaning machine. The finance department has come up with the following annual after-tax operating cash flows estimation: 50% probability of $3.05 million per year and 50% probability of $6.1 million per year for the next 5 years. Initial cost of investment is around $15 million and a 16% discount rate should be used.

i) Calculate the NPV of the project based on the above information.

(5 marks)

ii) If unsuccessful, after realizing the first year cash flow, the company has the option to dismantle the project and receive an after-tax salvage value of $11 million. Calculate the NPV of the project based on the option and recommend whether the project should be accepted.

(7 marks)

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