Do the following practice questions (for practice not for grading). By doing them correctly, you can demonstrate your understanding of how abandonment and expansion options are incorporated in project valuation. 1. The Newsome Corporation is considering the purchase of a new technology to help expand its current sales of axel-rods. The cost of the technology installed is $118,000,000 million. The company estimates that the present value as of the end of year one of all its cash flows (including the CF1) is $234,000,000 if the project is successful and $64,500,000 if it's not. The company assigns a 40% chance to success. The RRR or the cost of capital applicable to the project is 13%. a. Given the above information and based on static analysis, should the company go ahead with its investment? Answer: No because NPV - $0.92 million =- b. Upon further study the company realizes that, if the project was not successful, it can stop production and sell the equipment for an after-tax salvage value plus year-one cash flow of $92,000,000 (i.e. assume $92 million includes the first year CF). Given this information, should the company go ahead with the investment? Answer: Yes because the NPV is now $13.68 million c. What is the present value of the option to abandon? Answer: $14.60 million