Dash Plc, a property development and investment company is considering purchasing a disused airfield site to develop as a retail space. The purchase price of the land is E2.3million. Dash would need to spend an additional E6 million now to develop the site. The project will generate cash flows from rental income every year in perpetuity. If the local government builds a new road nearby, the yearly cash flows will be E1.1 million (with a probability of 0.5). If the new road is not built, the yearly cash flows will be E180,000 (probability 0.5). The first cash flow will occur in year 1.

Assume 8% is the suitable discount rate for all cash flows.

(a) What is the expected NPV of the project?

Suppose Dash can sell the developed site, if it chooses to do so, after one year E10 million.

(b) what is the expected value now of this abandonment option? is the project worthwhile?