Consider a project that requires an initial investment of 105 at time 0, and generates perpetual expected cash flows of 9.9 per year, starting at time1.

a. At a discount rate of 10%, what is the NPV of this project?

b. At time 1, what is the value of the project going forward? In other words, what is the value, at time 1, of the expected cash flows starting at time 2? (Ignore the time 1 cash flow and the initial investment.) (Use the same discount rate of 10%.)

c. At time 0, what is the value of exactly these same set of cash flows, i.e., the value of the ongoing project?

d. Now assume that there is an abandonment option embedded in the project. At time 1 the project can be abandoned (after receiving the time 1 cash flow) for an expected salvage value of 90. Moreover, you estimate that the volatility of the value of the ongoing project over the first year is 30%, and the 1-year (continuously compounded) risk-free rate is 1%. Using Black-Scholes, what is the value of this 1-year abandonment option? (For your convenience, the Black-Scholes option value calculator is provided in the spreadsheet, but the input cells are empty.)

e. What is the total NPV of the project, including this abandonment option?