Nebraska Instruments (NI) is considering a project that has an up-front after tax cost at t = 0 of $1,000,000. The projects subsequent cash flows critically depend on whether its products become the industry standard. There is a 70 percent chance that the products will become the industry standard, in which case the projects expected after- tax cash flows will be $800,000 at the end of each of the next two years (t = 1,2). There is a 30 percent chance that the products will not become the industry standard, in which case the after-tax expected cash flows from the project will be $200,000 at the end of each of the next two years (t = 1,2). NI will know for sure one year from today whether its products will have become the industry standard. It is considering whether to make the investment today or to wait a year until after it finds out if the products have become the industry standard. If it waits a year, the projects up-front cost at t = 1 will remain at $1,000,000 (certain cash flow). If it chooses to wait, the estimated subsequent after-tax cash flows will remain at $800,000 per year (t = 2,3) if the product becomes the industry standard, and $200,000 per year if the product does not become the industry standard (t = 2,3). There is no penalty for entering the market late. Assume that all risky cash flows are discounted at 9 percent and risk-free rate is 4 percent.

1) What is the expected NPV of the project if NI proceeds today?

2) If NI chooses to wait a year before proceeding, what will be the projects new expected NPV? Hint: Delay option

SHOW WORK