Jamba Rockers LLC (JB), has developed flexible displays and is considering investing in a factory to mass produce flexible displays to target growing foldable smartphone market. JB financed from internally generated cash flows; project is all-equity-financed. Initial investment of $600K. The project will be “up and running” by the end of 2022, with first year of revenues in 2023. Discount rate is 10% and expected cash flows from the project are as follows:

1. Year      Cash flows
2. 2022         ($600,000)
3. 2023        $95,000
4. 2024         $89,500
5. 2025         $82,900
6. 2026         $76,300
7. 2027        $700,770

(a) Compute the NPV of the project.

(b) Assume JB faces following two scenarios.
- Scenario 1: The technology will work as planned and no effect on project expected cash flows.
- Scenario 2: Additional cost, $100k per year (after taxes), is required due to technical difficulties.
JB’s management estimates a 10% chance for scenario 2. Compute the expected value of the project. Should the firm accept or reject it?

(c) JB can also decide to shut down this project after one year. If so, it anticipates that it can recoup $400,000 of its $600,000 initial investment, plus the first-year expected free cash flow of $95,000. Compute the expected value of this project. Should the firm accept or reject it?

(d) What is the value of abandonment option? How to interpret this value for decision-making purposes?