Intro Broadway Inc. is considering a new musical. The initial investment required is $1,610,000. Every year, the free cash flow from the project is expected to be $230,000, continuing forever. Investments with similar risk deliver a rate of return of 7%. 18 Attempt 1/10 for 10 pts. Part 1 What is the NPV of the project? 1675714 Correct Since the annual cash flows are constant and occur forever, we can use the perpetuity formula to find their present value: 230,000 NPV - 1,610,000+ 1,675,714 0.07 = Part 2 Attempt 1/10 for 10 pts. In fact, the annual cash flow of $230,000 is an expected value: there is a 50% chance that annual cash flow will be $517,500 and a 50% chance that it will be -$57,500. What is the expected NPV of the project if the company cannot abandon the project? 1675714 Correct Without the option to abandon, the NPV in each case would be: Best case: 517,500 NPV, 1,610,000+ = 5,782,857 0.07 Worst case: 57,500 NPV = 1,610,000+ 2,431,429 0.07 Expected NPV: E(NPV) = 50 % 5,782,857 + 50 % :( - 2,431,429) = 1,675,714 . The NPV is unchanged. | Attempt 3/10 for 10 pts. Part 3 What is the true NPV of the project if the company can abandon the project after the first year? 0+ decimals Submit Attempt 1/10 for 10 pts. Part 4 What is the value of the option to abandon? 0+ decimals Submit