Martin Development Co. is deciding whether to proceed with Project X. The cost would be $11 million in Year 0. There is a 50% chance that X would be hugely successful and would generate annual after-tax cash flows of $7 million per year during Years 1, 2, and 3. However, there is a 50% chance that X would be less successful and would generate only $1 million per year for the 3 years. If Project X is hugely successful, it would open the door to another investment, Project Y, which would require an outlay of $13 million at the end of Year 2. Project Y would then be sold to another company at a price of $26 million at the end of Year 3. Martins WACC is 14%.

a)If the company does not consider real options, what is Project Xs expected NPV?

b)What is Xs expected NPV with the growth option?

c)What is the value of the growth option?