Leung & Wei Limited (LWL) is considering a new project with a manufacturing capacity of 1500 units. LWL expects to sell 1,000 units per year at $40 net after tax cash flow apiece for the next 15 years. The relevant discount rate is 12%, and the initial investment required is $300,000?

1. What is the NPV?
2. After, the first year, the project can be dismantled and sold for $250,000. If expected sales were revised based on the first years performance, then at what level of expected sales would it make sense to abandon the project?
3. LWL thinks that it is likely that expected sales will be revised up to 1,500 units per year for the remaining 14 years if the first year is a success and revised downward to 500 units if the first year is a failure. If probabilities of success and failure are 60% and 40% respectively, what is the NPV of the project? Consider the possibility of abandonment in answering. What is the value of the option to abandon?
4. Suppose in part (c) after first year project can be doubled (additional capacity will be available one year after the start of the project) if the project is a success. This implies that if project is a success projected sales after expansion will be 3,000 units. Again, assume that probabilities of success and failure are 60% and 40% respectively, and option to abandon still exists. What is the NPV of the project? What is the value of the option to expand?

In all of the above situations first year sales will be 1,000 units.