EXHIBIT 1 Central Florida Computer Company Forecasts of Sales and Salvage Value State of Economy Recession Slow growth Strong growth Probability 0.35 0.40 0.25 Sales (Units) 300 400 500 Salvage Value (Selling Price) $100,000 400,000 900,000 EXHIBIT 2 Central Florida Computer Company Capital Structure Source Long-term debt Capital stock paid in Retained earnings Amount $3,500,000 1,000,000 4,000,000 If the economy is in recession, one option might be to abandon the project at the end of 2001 (it! will essentially become a one-year project). The machinery, with much less wear, might then have a salvage value of $850,000. However, if the economy is in slow growth or strong growth states, the firm will implement the project over five years. How does this information affect your expected NPV? What is the value of the option to abandon the project in the state of recession