InnoCam Ltd is a company that produce web cameras. In response to the recent trend of working from home, its management is evaluating whether to invest $290,000 in the development of a new high-resolution digital webcam. Unfortunately, the development will take one year to complete, and there is only a 20 percent chance of success. If a new high-resolution digital webcam is successfully developed, it will earn the company a net cash inflow of $600,000 per annum over the following years in perpetuity if the demand is high and $200,000 per annum in perpetuity if the demand is low. The probability of a high demand for the webcam is 60 percent and the probability of a low demand is 40 percent. If the development fails, the company will be able to salvage $60,000 by selling the development equipment. Required rate of return on this project is 20 percent per annum.

Required:

(a) What is NPV at year 1 (t=1) if development is successful? (2 marks)

(b) What is NPV at t=0? Should the management proceed with the project? (4 marks)